One of the cornerstones of conventional financial planning is making use of pension allowances. For most people an annual allowance of up to £40,000 is available in a tax year (April to April). For those with adequate earnings and sufficient means it is possible to squeeze a total of £160,000 into a pension during this period.
Pensions are often criticised in the Press for delivering weak investment returns, limited access, and generally poor value for money.
If we take those in turn. Modern workplace arrangements will frequently offer 130 + funds which scheme members can chose to invest through. More tailored personal pensions or self-invested pensions will often have a fund choice running into the 1000s. If regular reviews are taking place, a robust investment strategy could deliver healthy returns over time. We currently would expect a moderate risk taker to enjoy an average investment return of 5% + per year, somewhat better than holding savings in cash.
Pensions are predominantly designed to replace salary or self-employed profits when people reduce their working hours or retire. The fact that pensions cannot be accessed until your mid to late 50s may well be a distinct advantage. Disciplined, regular, long-term saving, along with the compounding effect of investments returns can result in sizeable pension funds. Therefore, the fact that you do not have the option to raid the pension for a family holiday to the Canary Islands or a new car helps to preserve your longer-term wealth.
A radical overhaul of pension legislation some 6 years ago has firmly put individuals in charge of their pension savings (defined contribution plans). There is no compulsion to give up control of the fund and buy an annuity. If fact you can drawdown from your pension when you want and what you want (post 55 years currently). What you don’t spend in your lifetime you can pass onto a beneficiary of your choice, potentially free of income and inheritance tax.
So, what’s not to like? We haven’t even touched on the tax relief benefits of making pension contributions, particularly for higher and additional rate taxpayers.
If you would like to discuss the merits of pensions in your wider financial planning, please contact one of the Wingate team.