Is a pension the best form of saving for retirement? Or is it better to look elsewhere?
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The end of the tax year is always a popular time for people to be reminded about their finances and investments. Couple that with the budget and the press is pretty much full of personal finance articles, it would seem.
“Instead, rather than locking the money away in a pension that is likely to be worth a relatively small amount when it comes to retirement, an ISA can provide a suitable home”
While some ideas can be very useful, it is always best to step back and check if what you are doing is the right thing.
I recently had a client approach me for advice. They wanted to start making pension contributions as they had failed to do so over the past few years and so they wanted to make sure they were doing their bit to help themselves when they get to retirement. This is the type of person that genuinely needs some friendly financial planning advice.
They wanted to invest £30 per month and naturally assumed a pension would be the ideal product when saving towards retirement. Wrong. A pension is one type of product that can help you save towards retirement, but there are plenty of others.
In this particular case my suggestion was to invest the money into an ISA instead.
The investor is a basic-rate tax payer now and will be a basic-rate tax payer in retirement. If the receive 20 per cent tax relief on their contribution into the pension they will pay 20 per cent tax on the income they draw out of the pension. So there is not all that much benefit to be had there, apart from the 25 per cent tax-free cash they can draw upon taking their pension.
Instead, rather than locking the money away in a pension that is likely to be worth a relatively small amount when it comes to retirement, an ISA can provide a suitable home. It does not offer the same tax relief on contributions in, but it doesn’t charge income tax when you take money out. So the in/out tax status is fairly neutral. But what you do get is the benefit of accessing the money any time, and being to do whatever you like with it.
Find an independent financial adviser to help you make the right decisions for your retirement.
About the author
Jaskarn Pawar is a Chartered Financial Planner and Certified Financial Planner. As an investment specialist he also holds the Investment Management Certificate and has worked for some of the most highly regarded financial planning firms in the City.