Saturday , May 25 2024

Do I really need a pension

There are lots of excuses to not start putting money in a pension: you’ve got years to do it in, you’ll probably downsize and make a profit from property, the lottery has to turn your way soon…

Sadly there’s no valid reason, besides already having a fortune tucked away somewhere extremely safe, to not ensure you’re paying in to the very best pension possible from as early as you can.  Men are looking at a retirement of around 17 years while women commonly live 26 years beyond retirement.  That’s a long time to live off of your savings, and despite the common view that old age is cheap, research shows that your outgoings change only minimally between the ages of 30 and 70, children or no children.

A state pension offers around £80 a week, barely enough to buy food and pay bills, and that’s assuming that the massive pension shortfall we’ve been hearing do much about doesn’t slash those figures even further.  Not only that but those pesky life expectancy figures are going up all the time and medical breakthroughs are coming thick and fast – who’s to say we won’t all be seeing 110 by 2020?  And if we are there’s going to be less money to go around more people – to put it simply.

So it’s inevitable that, one way or another, you’re going to need cold, hard cash from the year that your bus pass kicks in but how is taking out a pension better than simply saving money in a bank account?  It’s all down to tax relief and interest rates.  According to if you were to save £50 a month from the age of 20 and keep it in a moneybox you’d have £27,000 by the time you were 65 – not much more than the average annual salary according to recent statistics.  However if you were to invest the exact same money in a typical pension, growing at around 9% per annum, excepting charges you could expect to have saved £314,000 – more than eleven times as much.

Pensions are subject to tax relief subject to certain limitations, basic rate tax paid as you earn is refunded to money in a pension while higher level tax can be claimed back through self assessment.  At the same time money made through pension investments is subject to different tax laws which means you’re making money without paying additional tax on your profits.  Additionally at the time of retirement you have the option of taking a lump sum (at the moment 25%) of your pension entirely tax free.

Not only is the government giving you benefits through a pension scheme but should you be offered a contributory pension by your employer they may pay a certain amount in to your fund too – in many ways money for nothing.  Depending on what kind of scheme your employer offers they may match your payments or even offer more.

Calculations suggest that a 25 year old paying £100 a month in to a pension can expect around £12,000 a year at retirement – with this in mind the earlier you start your pension the better.
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About John R Crawley

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