Plan for retirement with a pension
The issue of personal pensions and saving towards retirement divides opinion or perhaps worse, results in a response of general apathy. Investors are subject to a constant barrage of legislative changes and negative media comment. Recent research from the University of Sheffield suggests that British retirees are aware that they may face a difficult future but have yet to make adequate provision.
So why use a pension to save for retirement? Firstly and often strangely overlooked, the tax advantages are considerable. Personal contributions qualify for income tax relief at an investor’s highest marginal rate of income tax and company contributions on behalf of employees usually benefit from corporation tax relief. These contributions are in turn invested in an environment in which investment returns are more or less tax free. Under current legislation, 25 per cent of the eventual fund is also available as a tax free lump sum on retirement.
Secondly, the flexibility which is available from a personal pension can be considerable. The range of underlying investments varies from collective investment funds and individual shares to commodities and commercial property, and there is now a tremendous amount of choice and flexibility. More modern policies also allow investors to select pensions which can grow with them over time and without the need to move to a new provider, starting off as a low cost vehicle with limited investment choice while also providing the functionality to ‘switch on’ additional features in future as the pension fund becomes larger.
Thirdly, the options at retirement have blossomed over recent years, so that it is no longer necessary to simply buy an income for life with the accumulated fund. A wider variety of choices now exists, ranging from ‘capped’ and ‘flexible’ drawdown to short term annuities and ‘third way’ pensions.
As ever, appropriate planning and expert advice plays a vital role in navigating the pensions environment, from the point at which an individual decides to invest into a pension and must choose a suitable policy and provider, to the ongoing investment and contribution strategy as the pension fund accumulates, to the way in which the retirement benefits should be structured.
Beever and Struthers