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The
reason to invest in a Pension is to provide an income in retirement.
The Government supports this idea so Pensions enjoy favourable
tax treatment. |
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If
you are a basic rate taxpayer, for every £100 invested
personally into a Pension the Government will add £25.
So the £125 investment has cost £100 – not
bad! |
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If
you are a higher rate taxpayer for every £100 invested
personally into a pension the Government will add £25
and will give you further relief of £25. So the
£125 investment has cost £75 – not bad at all! |
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In
addition the investment income and gains grow largely tax free.
Let's tuck in! |
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Wait
a minute. The price paid in return for this attractive tax status
is a lack of flexibility. The money and investments are no longer
yours, they belong to the pension scheme and although you can
transfer from one pension to another, there are significant
restrictions on withdrawal. |
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Basically,
you must start drawing the Pension between the age of 50 and
75 (it is normal to draw your pension between age 60 and 65).
At that time you are able to take around 25% of the fund value
in a cash lump sum (no tax is paid on this cash – it is
yours to invest or spend) and with the balance of the funds,
you have to buy a Compulsory Purchase Annuity, which is the
retirement income – this is all taxable as income. |
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There
are many different types of Annuity (some grow each year - some
don't, some provide for a spouse – some don't, some are
guaranteed – some aren't). If you choose the wrong one,
you can lose out; if you die early you can really lose out;
if you choose the wrong one and die early your dependants are
in real trouble. |
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In
short they are a gamble. |
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At
least if you die before drawing the pension, the value of the
funds will pass tax-free to your dependants. |
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So
there you have it – compelling advantages and compelling
disadvantages. |
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There
are other ways to build up capital to pay an income in retirement
– none offer the combination of such a wide range of investment
opportunities, tax status, restrictions and rules. |
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On
balance, we do recommend pensions. |
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We
also recommend that pensions should be looked upon as only one
element in a broad range of investment vehicles (all of which
can help in retirement) including debt repayment, ISA's, Unit
Trusts, property and deposits. |
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And
we recommend that if you opt not to invest in a pension, you
should be very clear and confident of the source of your income
in retirement. |
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