It seems impossible to open a newspaper at the moment without reading yet another headline attacking pensions.
‘Interest rates keep annuities low.’
‘Pension companies still overcharging.’
‘Stock market falls wipe billions off pensions.’
There’s no doubt at all that if you’re in a final salary pension scheme – or you’re in a private scheme where the employer is matching your contributions – a pension is the best way of saving for your retirement.
The same comment applies if you’re a high earner who can take advantage of the very attractive tax breaks available on pensions – particularly if you can channel money into a Self Invested Personal Pension.
But what if you’re not? What if you’re an average self-employed person who needs to fund his or her own pension, or you’re in a company scheme where your employer doesn’t contribute? After reading headlines like the ones above, you’d be forgiven for thinking that a pension wasn’t worth it. And there’s no doubt that a significant proportion of the population would agree with you. A recent poll in the Guardian showed that despite successive Governments’ encouragement, 43.7% of people thought that pensions were no longer worthwhile.
As with many aspects of financial planning, there isn’t a definitive right and wrong answer: the answer is what suits you best, given your own individual circumstances. But to help you gain a more informed opinion, here are three arguments in favour of pensions, balanced by three arguments against them.
1. First of all, pensions enjoy generous tax breaks. Every £1 you contribute has another 25p of tax relief added to it. The pension fund grows largely tax free and when you come to take your benefits, up to 25% of the total fund can be taken as tax free cash.
2. Recent reforms have meant that there’s now much more flexibility when it comes to taking the benefits from your pension. It’s no longer the case that you have to buy an annuity and that’s it. For example, you can now ‘drawdown’ an income from your pension, meaning that some of your accumulated pension pot could even be passed on to your children.
3. Finally, the fact that money in a pension is “locked away” until you retire is a real advantage. However much you might want to, savings in a pension can’t be accessed for a new car or kitchen extension, something which isn’t the case with other forms of saving. If you’re the type of person who isn’t very good with money, this could help to protect your retirement savings.
But what about the other side of the coin? Here are three arguments which suggest that alternative forms of saving might be better than a pension.
1. Pensions are inflexible: they simply don’t fit in with the fact that many people have lots of different jobs during their working life. Far too many people end up with several different pensions which are hard to keep track of and even harder to value – meaning that accurate retirement planning becomes almost impossible.
2. Despite the tax breaks pensions enjoy, the charges levied by the providers, the fund managers and the salesmen significantly erode growth. And in many cases the default funds suggested by the product providers give poor returns.
3. Yes, the recent changes to pensions legislation give more flexibility at retirement – but the vast majority of people will still end up taking an annuity. At the moment low interest rates mean that annuities are very poor value for money – and that situation is likely to apply for some time to come.
There you have it – two completely contrasting points of view. Pensions will be an essential part of some people’s financial planning, but completely wrong for others. Two things though are undeniable: we’re all living longer – and some form of saving for your retirement is essential. It might be a pension: it might other routes such as an ISA or National Savings.
That’s why taking independent financial advice is so important. We will be able to advise you on your existing pension schemes, look at pensions you might have from previous jobs and advise you on the method of saving that is right for you. Above all, we’ll be able to tell you how much you need to save and we’ll stress the one key point about saving for your retirement – doing nothing is not an option.