Pensions – Why Bother?

There is a widespread perception that pensions are a waste of money, with reasons mentioned including poor investment returns, high costs, complex rules and difficult to get your money out.

Yet, if pensions are bad and not worth bothering with, why is the government progressively restricting pension contributions and the size of pension funds?

We are all living longer, with the average 65 year old today expected to live into their mid-80s. The cost of living and our desire to enjoy our retirement also mean there is greater pressure than ever on our budgets. With an ageing population, the State is struggling to offer an adequate safety net for pensioners and those requiring care. In addition, against a backdrop of rising taxes, it is now very hard to save out of taxed income.

A pension remains one of the single most tax-efficient vehicles for long-term saving, particularly for higher rate taxpayers, where effective rates of tax relief can be up to 60% for high earners. There is the additional prospect of saving National Insurance, 12% for employees and 13.8% for employers. After all, a pound of tax saved is just as good as a pound of investment growth!

Moreover, pensions have changed over recent years. Using a Self-Invested Personal Pension, it is possible to invest in almost any investment fund, as well as shares or commercial property, at a competitive cost to accumulate wealth in a tax-free environment.

Getting money out of a pension has changed too. There is no longer a requirement to lock into an annuity by age 75. Instead, there is a range of pension income strategies, which can balance flexibility, income tax mitigation and death benefits. The right planning, particularly if started early, is key to maximising pension benefits, as well as how best to combine pension income with other investments in retirement.

In summary, for most people, pension saving should be at the heart of any retirement planning strategy. Pensions remain the most tax-efficient long-term investment vehicle. I will return to this and other personal finance issues in my weekly column starting after Easter.

[Matthew Clark, Western Morning News, Personal Finance Supplement, 28 March 2013]

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