Constantly drummed into us is the message that we need to prepare for our finances in retirement – or risk spending our later years counting the pennies and wishing we’d paid more attention to our savings plans. With an ageing population, the UK is unlikely to be able to afford the costs of state pensions for much longer – an issue that is already leading to rules meaning people will have to work longer before they can access it.
And personal pensions come with a huge tax advantage – for every penny you pay in, the Government will contribute an amount equivalent to the tax you have paid. So if you are a basic rate taxpayer, for every pound that goes into your pension fund, you need only supply 80 pence. It gets better if you are a higher rate taxpayer – the amount you need to pay in is just 60 pence out of every pound.
Your pension savings are generally invested on the stock market, which has historically provided better returns than simple cash savings over many years. And because a pension is a long-term investment, it will be able to weather the peaks and troughs of the markets, hopefully providing you with a larger sum when it comes to your retirement date.
While the majority of pension funds are currently used to buy an annuity, which pays out a regular income, there is also the option of taking up to 25% of the value of the fund as a tax-free cash lump sum when you come to retire. And this can be used for anything you like – clearing all your debts, carrying out home improvements or simply picking that holiday of a lifetime!
While a personal pension should be considered as part of an overall retirement strategy, it should not be the only option. While it does have tax advantages, it is an inflexible product that ties up your savings until you retire – and as such doesn't take account of life changes, such as illness or redundancy. You're also tied in to spending the majority of the fund on an annuity when you come to retire, which may not be the best fit for your needs.
You are also at the mercy of the stock market – which can be an eye-watering rollercoaster. More cautious investors, who prefer to keep their savings in cash, or the less risky gilts and bonds, are typically not catered for. This is particularly true when your retirement date is some way off.
And there are attractive alternatives. While ISAs don't have all the tax advantages of a pension plan, they are far more flexible and offer a wider range of options to meet your needs. Should you fall ill, say, and need access to your cash – or plan to retire early – this could be a great option for your future financial planning.
Although property is only just coming out of a slump, over the long term it has been regarded as a valuable investment. And when you reach retirement age, you could access equity release schemes, which allow you to take money from the value of your property with no need to make any payments until the property is sold.
Issued by Sainsbury’s Finance