With so many other things competing for your money – your mortgage, school fees and family holidays, to name just a few – it’s very easy to put off doing anything about your pension. Justin Urquhart Stewart explains more.
But I hopefully have a message for you that will resonate: it’s never too late to start; and it’s almost always too early to stop.
The problem for many is that pensions are beset by quite a lot of jargon, and people often think that because it can all get quite complex quite quickly that they’re a bit risky. However, what people tend to forget is that all investments come with risks – so financial markets do gown down as well as up. And there are other risks such as those with property: it’s not terribly tax efficient (and getting less so); it can take months to sell; and it comes with a fair share of (hidden) costs. And while prices have generally gone up, they don’t always.
If you are particularly risk averse, you could of course decide to keep your money in the bank. But even with your money in a high interest rate savings account, it might not achieve a return that always outpaces inflation. This means that if you’re not getting at least 2.6% at the moment, you are actually losing money over the long term. That’s almost certainly not the type of steady return you would be looking for!
I believe that there are some really good reasons why you should be investing in a pension given how essential it is to achieve any long term savings goals you may have.
Here are a few key points:
The capacity for compounding
When you invest your money in a diversified portfolio of investments, not only are you spreading your risks, you also stand a better chance of your returns achieving more than inflation over the long term. On top of that you can benefit from compounding. For example, if you were to invest £200 each month for 20 years and achieve a cautious return of 3%, you could gain an additional 37% or £17,690 on top of your £48,000 savings. If you seek a 5% return over 20 years, it could give you a return of 72% or another £24,059 on top of your money.
If you contribute, others do too
If a friend or someone in the family offered you free money with no obligation, you would typically jump at the chance. And while the Government’s probably never classed in those terms in your mind, that’s exactly what you do when you save into a pension because of the tax benefits. Taking the above example again, your £200 a month investment actually only translates to £160 from your pocket if you are a lower rate tax payer, and £120 if you are a higher rate tax payer. This is due to pension tax relief. And if your pension is part of a salary sacrifice scheme, i.e. your pension payments are taken from your salary before you pay tax, you could also pay lower National Insurance Contributions.
Reducing Inheritance Tax (IHT)
Pensions can also often help protect some of your hard-earned capital from IHT liabilities. When you die, any money that’s left in your pension pot will pass to your beneficiaries, potentially with no inheritance tax due depending on the type of pension you have. Depending on whether you’re younger or older than 75, the withdrawals that they make could also be tax free. As you’ll probably realise, some of this can get quite complex quite quickly and will depend on your own circumstances. The tax rules highlighted here will also probably change from where they current stand. However, it’s an area worth investigating and planning for.
Stay invested throughout retirement
Even after you retire, it’s just common sense to remain invested for as long as possible. This may sound strange as you want to use your pension for your retirement. However, given longevity levels, you could be living for at least another 20 years. And, during that time, your money needs to be able to at least keep pace with inflation.
Even when your money’s invested, you can still access the money – you don’t have to sell your whole portfolio at once. So you can keep your pension pot invested and draw an income from it. You decide how much you want to stay invested, what income you can take and what level of investment risk you’re comfortable with. And you can change your mind in the majority of cases. I do recommend though getting some professional advice to ensure you know all your options before you make a decision.
Whatever you do, just please do something. Many people get put off by the subject for a variety of reasons. Just taking some small steps can mean a big difference in retirement. But many aren’t doing anything and that could result in a retirement that has to be endured rather than enjoyed. We just don’t want you to be one of the ones enduring.