The savings dilemma: should you bother with a pension?
We are all living longer and as a reault we need to save more for our future.
However, complex charges, mis-selling scandals and mixed perfromance has left many people questioning the value of having a pension.
Here, we ask the experts to convince the sceptics that saving in a pension is better than leaving their financial futures to chance…
Ros Altmann, pension expert and former government adviser
Unlike most other savings and investments, when you save in a pension, your money is locked away until you retire so you’re not tempted to dip into it.
Pensions are probably the most cost effective way to save for retirement. That’s because they offer tax relief at top rates and because most people will receive an employer contribution as well. Indeed, even for basic rate taxpayers, putting £1 into a pension can automatically double to £2 with the addition of the employer contribution and tax relief in auto-enrolment.
Many people are wary of pensions, following so many scandals in the past, however modern pensions have lower charges and better regulation which may help deliver better outcomes. Of course, as we are all expected to live longer, it is important to ensure that we save enough to last for the extra years of life expectancy.
Pensions are not the only way to save though. ISAs could be used as a more flexible alternative. The money going into an ISA is already taxed, but the investment returns and income taken out are tax free, whereas tax is paid on pension income and with ISAs there is more freedom to just spend the money, rather than having to buy an annuity or income drawdown product.
The important thing is to do some saving, because if you spend all your earnings today, you won’t have more money to live on in future – you can’t spend it twice.
Morten Nilsson of NOW: Pensions
With workplace pensions, when you pay in, your company pays in too. Think of it as getting a pay rise so don’t turn down the chance to be part of your company’s pension scheme.
Boring as it might sound, saving into a pension is one of the most tax efficient ways to save. Your pension contributions are before tax and grow tax free which can significantly help to boost the amount you have in your pension pot.
The effect of tax relief on pension payments over time can be considerable and the more you contribute, the more tax relief you can get. For people in the higher rate tax bracket, this means they can top up their pension savings by 40 per cent through tax relief, so that a £100 contribution to their pension pot only costs them £60. At retirement, you also get 25 per cent of the value of your fund as a tax free, cash lump-sum.
Jason Holland of Bestinvest
We’ve all read the headlines about pensions mis-selling, their charges, complexity and poor performance: let’s face it pensions get a bad press. And many are simply put off at the prospect of tying their money away until at least age-55, so opt for investing in property or ISAs instead.
Yet the simple facts are that most people are woefully underfunded for their retirement years and urgently need to take action. Pensions offer investors an extremely favourable tax environment in which to build a retirement fund, that is quite simply unmatched by any other investment scheme.
In particular pensions are especially attractive to those investors who subject to the higher rates of tax, as for a 40% tax payer the effective cost of a £10,000 pension investment works out at just £6,000, a deal which you might think sounds too good to be true. And all returns in the pension accrue tax-free.
Importantly, pensions have been revolutionised in recent years thanks to the growth of low cost Self Invested Personal Pensions. These provide both the benefits of a consolidated account but with a wide breadth of choice, so that you can own exactly the same sorts of funds you might select in your ISA and are no longer limit to choosing from a selection of dull in-house funds managed by a life insurance company.