ISAs Maximising ISAs is an increasingly important tax planning area…
Over the last year I have come across quite a few customers who have been trying to save for retirement using bank/building society accounts or even National Savings. I also met up with my young niece recently who quickly told me that she’s invested in rental property as her retirement plan “because we don’t believe in pensions”. Since the conversation was at a social event I decided not to get involved in a long discussion on the merits, or otherwise, of pension plans. However, this did make me think that there’s a huge amount of mistrust and/or misunderstanding of pensions and that clients sometimes positively avoid them. So I decided in this article to put a few points in favour of the pension plan as a way of saving for retirement.
Here are a few comments I’ve recently come across:-
“Saving in a bank or building society is simpler and less complicated”
The problem at the moment with banks, building societies and National Savings is that the returns are very poor. In fact, once inflation starts ramping up you might be losing money in real terms. You also miss out on valuable tax relief by ignoring pensions. If you make a contribution directly to your personal pension and obtain tax relief at source, you can increase your payment via tax relief at 20% from the taxman. This means for every £80 you invest, the government will top-up your contribution by £20. This is even the case if you are a non-tax payer. Once invested, your fund enjoys a tax favourable environment which helps your retirement fund to grow.
“The charges on pensions outweigh the benefits”
Many people are confused by charges and in the past pension charges were indeed very complicated. Fund management, administration and advice on pensions all have a cost but these charges are probably lower and more transparent than they have ever been.
“We are going to rely on the State Pension”
Changes to the State Pension will mean lower pensions for many of the younger generation. This is because they will not be able to build up the additional state pension benefit and will have a flat rate basic state pension only. With a growing population of retirees, pressure on the welfare state and the introduction of auto enrolment, State Pensions might become less generous and take longer to access. Most people will need a retirement plan of some sort to survive through retirement and a tax advantageous savings plan (a pension) is probably the best strategy. Future generations will also have to wait considerably longer to be able to claim their State Pension. The government has promised regular reviews on mortality rates and this will almost inevitably mean a longer wait for State Pensions.
“We are going to buy a property and rent it out – we don’t believe in pensions”
For many people, the cost of property purchase means that this just isn’t a viable option. Making regular, affordable savings towards retirement can be made via a pension plan which means that pensions are accessible to most people. When it comes to property, there is sometimes a perception in the general population that somehow bricks and mortar just can`t go wrong. However, this is an asset class just like any other and it’s prone to overheating and crashing just like many other asset classes. I have met a number of clients who invested in second properties during the 90’s and got caught out by excessive interest rates, which, in many cases, caused great stress. I`m not suggesting that this is about to happen again, but buy-to-let is not inviolable.
Impending tax changes (from 2017) mean that making money out of buy-to-let will be more difficult in the future. Indeed, the National Landlords Association has recently suggested that investors may sell off 500,000 properties in the next year as the new tax charges begin to bite. Property is also a fairly illiquid asset which poses another risk. However, even taking into account all these issues I believe that many retirees will continue to invest in this asset despite all the uncertainties. Investing directly into property also means missing out on the tax breaks (mentioned above) available with pensions.
“Pensions aren’t easily accessible”
This is to some extent true. However, this can be an advantage for many people meaning that they are forced to earmark their savings specifically for retirement and it stops the fund being raided for other things. Furthermore, making regular savings may instil a level of discipline which can be advantageous in the long run. In normal circumstances, you can access your pension funds at age 55 (although this will be moving up to age 57 as the new State Pension age increases). Tax-free cash also is available at retirement from your fund, if needed. The new pension freedoms have made pensions more accessible than ever.
“At some point your pension company get to keep the fund”
The new pension freedoms mean that you can now fully access your fund, if you want, and you don`t have to buy an annuity if this is unsuitable. It is also possible to arrange for your partner, children or grandchildren to potentially benefit from your pension fund on death if you don`t exhaust your fund. Funds can be passed on without attracting IHT. This can be a tax efficient way to pass on money down the generations.
I hope this article has clarified a number of points and helped readers to appreciate that personal pensions are simply tax-efficient savings plans which can help you build up your own retirement funds. Misconceptions, mistrust and a lack of understanding can often act as a discouragement which prevents investment into this valuable product.
Please note pensions are a long term investment. The capital you invest may go down as well as up and you may not get back the full amount invested. Pensions legislation and tax treatment can and may change in the future.
Please contact Helen Mulvaney of Richmond Independent for further details. Tel 01395 512166
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