This is blog of two halves about pensions and saving for retirement, this being the second article and it concerns saving through a Pension. The first one was about Buy to Let property investment.
The answer to the question posed remains a resounding, ‘it depends…’. There’s no definitive right or wrong here; it depends on individual circumstances, opinions and attitudes. There are advantages and disadvantages of both, which is what this article is about. I just want to highlight what the questions are that you need to consider before deciding.
So, here’s a quick look at the pros and cons of saving for retirement through a pension:
Less volatile than investment in the property market, pensions have been around for a long time. Since Roman times, in fact, as army centurions received an annuity of land and money if they survived lengthy active service (Source: BBC).
Fundamental to pensions is the principle that you must put enough money into the pot to achieve your desired level of income after retirement.
For me, the advantages of pensions include:
Diversity: A pension allows you to invest in a broad spread of assets, which can diversify the portfolio and align with the savers attitude to risk.
Flexible saving: Pensions offer a pay-as-you-go method of saving for retirement. You can stop and start your contributions at will, choosing to increase or decrease the amount you are paying in to suit your lifestyle.
Others pay in for you. If you have a workplace pension, you’ll benefit from three parties chipping in:
- You – the employee
- Your boss – the employer
- The Government – through tax relief
So, it’s a really good way to save for retirement, as your own contributions are boosted significantly.
Here’s an example to show you how it works. For an employee earning the UK average salary of £27,195 (Source: ONS) in the 2018/19 tax year, as long as both parties contributed 3%, monthly contributions would be:
- Employee contribution of 3%: £42.64
- Tax relief: £10.66
- Employer contribution: £53.30
This means that your monthly pension payment of £42.64 is more than doubled to £106.60.
Tax– efficient method of saving: your pension has a ‘tax wrapper’, allowing it to grow without incurring tax liabilities (subject to conditions).
It can be inherited: If you die before the age of 75, you can leave your pension to loved ones, tax-free. If you’re over 75 when you die, you can still pass your pension on, but those inheriting it will have to pay income tax.
The Disadvantages of a Pension
The main disadvantages of pensions are:
Complexity: Pensions are often very complicated, and without professional advice, people may not necessarily make the right decisions with:
- how much to pay in;
- their attitude to risk;
- the most appropriate investments to make within the pension;
- how and when to draw down their money.
Lack of options if circumstance change. When you pay into a pension, the money must stay invested until you’re at least 55 or suffer exceptional ill-health. Should your financial circumstances change before this point and you need access to the money early, you can’t get it.
Restrictions: You can’t usually access your pension until you’re at least 55 years old. This age will rise from 2028. It’ll be linked to the State Pension Age and will probably follow 10 years below it from then on. OK, most of us won’t have built up enough pension to retire before that age, but if you have, your choices are restricted.
There are no easy answers with saving for retirement, as everybody has a diverse set of goals, ambitions and dreams. Let alone attitudes to risk. One easy answer, however, is to take professional independent financial advice. A good adviser will help you work out what is important for your later years. Then you can put a plan in place to achieve it.
For more information on saving for retirement (whether that be by pension, property or other means), contact me, Naz Miller on 07786 653 359 or via the contact section of this blog site.