top of page

Is a Pension the Best Retirement Strategy?

Paying Money Into Your Pension Is a Tax Efficient Way to Save For Your Retirement, But There Are Alternatives You Should Consider



It’s always important to remember that saving for retirement is just about building up enough money. It doesn't necessarily need to be in a pension.

 

Paying into an ISA or paying off your mortgage are equally valid retirement planning strategies.

 

PENSIONS TIE-UP YOUR MONEY

 

The main downside to pensions is that you usually can’t access your money until at least age 55 (rising to 57). This means that if you are in your 20s or 30s, your money may be inaccessible for multiple decades. It won’t help you with a deposit on a house or to pay for emergencies, for example. You therefore need to weigh this up against the tax benefits.

 

GENEROUS INCOME TAX RELIEF


If you can afford to tie money up, pensions can be a very valuable retirement planning tool.

 

When you pay money in, you receive income tax relief at your highest marginal rate.

 

This means that, once you have reclaimed the relevant tax relief, for a 20% taxpayer it costs £800 to get £1,000 in a pension, whereas for a higher rate taxpayer it only costs £600 and for an additional rate taxpayer it is just £550.

 

In fact, for those people whose income is just over £100,000, or where income is in the £50,000 to £60,000 bracket and Child Benefit is being lost, it is possible to obtain the equivalent of 60% or more in tax reliefs.

 

COMPOUNDING TAX-FREE RETURNS


All income and growth within your pension build up tax-free.  The compounding of these tax-efficient returns can be a significant benefit.

 

In addition, when you come to take money out of your pension, you can have up to 25% of it tax-free (subject to Lifetime Allowance limits). The rest will be subject to income tax.

 

IT PAYS TO THINK AHEAD


If you think you will be a basic rate taxpayer in retirement, but are a higher or additional rate taxpayer now, you can get excellent value from pension contributions.

 

If you are basic rate taxpayer now, but expect to move into the higher rate as your career progresses, over and above what you need to pay in to benefit from your employer’s pension contributions, you might choose to save into an ISA in the knowledge that you can make larger pension contributions in a few years’ time and benefit from a higher rate of tax relief at that point.


AFTER YOU RETIRE

 

Once you reach retirement age, you have flexibility over the amount and timing of when you take money out, allowing you to tailor the withdrawals you make to suit your expenditure needs and your personal tax position.

 

PENSIONS HAVE INHERITANCE TAX BENEFITS TOO


Another significant benefit of pension funds is that they can generally be inherited by your chosen beneficiaries free from inheritance tax. Furthermore, if you were to die before age 75, your beneficiaries would not even have to pay income tax on withdrawals from the inherited fund.


ISAs, on the other hand, form part of your estate for inheritance tax purposes.


A COMBINATION OF ASSETS IS OFTEN BEST


Pensions and ISAs are both good but the balance probably favours pensions as your career progresses because you generally earn more and you are that bit closer to being able to draw on your pension. 

You can have ISAs and pensions at the same time and a combination of approaches is often the best solution. 


If you'd like to discuss options for saving for your retirement, please give us a call today on 020 3488 9505.



The value of your investments can go down as well as up, so you could get back less

than you invested.

Tax and Estate planning is not regulated by the Financial Conduct Authority.


Kommentarer


bottom of page