Pensions

A common reason for saving has always been to ensure that we’re ‘financially secure and comfortable’ when we retire.

The steady rise in life expectancy means that more of us can look forward to a long and more financially demanding retirement than our forebears.

It means we have to ensure we have adequate income to both meet our needs and continue to enjoy the lifestyle we may be accustomed to.

If we’re going to have to save for the future, we need to make sure that those saving schemes deliver the best possible return. Although we could put our money into a savings account, as many people still do, growth in its value will depend on interest rates.

When interest rates are high, our savings will grow – when they’re low, our savings will stagnate. Even worse, if the interest rate is less than the prevailing inflation rate then the value of our savings will deteriorate in real terms. And then there’s tax.

Unless we put our money into an ISA, we’ll be taxed on the interest our money earns – if interest rates are low, we may as well put the money under the mattress.

We need an alternative strategy. Instead of relying on interest rates to increase our savings, we need something that may – potentially – give a better return. ‘Investment’ is the obvious choice as it shares a fundamental concept with ‘saving for retirement’ – both should be considered on a long-term basis. Pension schemes are long-term saving schemes that are probably the most tax-efficient form of saving.

To start with, contributions into the scheme benefit from tax relief, something which offers a huge advantage over any other form of savings plan. In addition, our money grows tax efficiently while it’s invested and, when the time comes to use our ‘pension pot’, we can usually take a portion as a tax-free lump sum.

Although most pension schemes use investment as a growth mechanism, as a ‘private’ investor, we’re often limited as to how we can influence what we eventually get. In fact, of the three broad types of pension, realistically, we can only influence and manage one of them.

The State Pension It’s long been acknowledged that the State Pension is too little to live on which is the reason why there is so much government emphasis on supplementary pension schemes. As a potential investor, there’s little we can do to influence what we eventually get when we retire apart from making sure that we keep up to date with our National Insurance contributions and maximise the number of qualifying years we have.

Workplace pensions The great thing about these is that our personal contribution is generally matched by a similar contribution from our employer and this means our pension pot grows faster. On the other hand – and quite understandably – employers tend to err on the side of caution when it comes to investing the money. In reality, there’s little we can do to influence what we receive from a workplace pension scheme other than to maximise the contribution we make. (See our guide to Workplace Pensions.) Private pensions This is an area where, as investors, we have free rein and can directly influence – for better or for worse – the pension we’ll eventually receive.

Private pensions include personal pension plans, stakeholder pensions and SIPPs (Self-invested Personal Pensions). It’s important to stress that, although labelled as a ‘pension scheme’, there’s no obligation to use the fund for that purpose – effectively they are just very tax-efficient saving schemes.

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The value of investments can fall as well as rise and you may not get back the amount originally invested.

How can Patrick Wayne Wealth help you?

PW wealth is here to help you. We’ll work with you, assess your current circumstances, review your retirement goals and help you put in place a pension strategy to meet them, ensuring that having a ‘financially secure and comfortable retirement’ isn’t something that’s left to chance.

Talk to an Adviser