Diary of an adviser: Pension isn’t a dirty word
Pension isn’t a dirty word – just a tax wrapper that helps you save money for your retirement
Many people tell me they don’t like pensions and I often feel that the word “pension” has itself become a bit tarnished. And it’s not surprising why when you think about all the scary stories in the headlines, everything from Robert Maxwell raiding his company’s pension fund to public sector strikes over final salary pension deficits – there rarely seems much good news about pensions. But then good news rarely makes good headlines.
Pensions are complex and confusing and let’s face it when we’re young no-one wants to think about getting old.
So let’s de-mystify pensions. I start by explaining to clients that pensions are just a tax wrapper, in the same way as an ISA or Bond is a tax wrapper. The underlying investments can be the same or different.
What makes pension particularly attractive as a way of saving for retirement is that you get income tax relief. What does this mean? If you are a basic rate tax payer and want to pay £100 into pension it will only cost you £80, whilst a higher rate tax payer only can reclaim a further £20 and an additional rate tax payer gets 50% tax relief on their pension contribution! And once in a pension the money invested grows virtually tax free.
Drawing your pension
Because pensions have had such a bad press people are often surprised that they can draw their pension from age 55 and that you can get 25% of your pension fund tax free as a lump sum. Even if you are not retiring, many clients like to get this money to pay off their mortgage or go on that holiday they’ve always dreamed of. When you draw your pension the income IS liable to income tax, just like a salary.
Where your pension is invested
Most pension contracts will have a default fund, where your money is invested, but this may not match your attitude to risk. I met with a client recently who wanted to arrange some investments and was very interested to make sure that she wasn’t taking too much risk with her money. When I asked about her pensions, she hadn’t thought much about them, and was surprised to discover that her four different policies totaled over £80,000 – much more than her savings. One of her pensions was sitting in cash earning virtually no interest, whilst another was invested 100% in shares, neither of which were appropriate for attitude to risk.
The importance of regular reviews
Like all investments, pensions should be reviewed regularly – you wouldn’t plant a garden and then leave it for a decade and hope it had weathered the storms. We recommend that clients review financial planning annually. To review your existing pensions, or to set up a new pension, you ideally want an adviser who holds the Advance Pension Planning qualification which means they can advise on all areas of pension planning including occupational pensions.