Become a pensions expert in five days - the final part

by Ed Bowsher on 05 July 2009  |  8 comments
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Here's the last part of my introductory guide to pensions.

So you may have heard that the government plans to introduce something called a personal account in 2012. 

The basic idea is that everyone who is working between the ages of 22 and 65 should be contributing towards a pension. This needn't necessarily be via a personal account, but from 2012 an employer must offer some form of pension scheme - the personal account is the 'default option' if you like. All employees will have to contribute to a personal account or some other form of pension unless they opt out. 

Personal accounts are controversial. Shadow chancellor George Osborne isn't a fan, for example. But I think they're a positive move. Anything that will push more people to save for retirement is a good thing in my book. 

Pensions v. property v. isas 

This is the last issue I want to look at: do you have to save for retirement via a pension? 

I think a pension is the best retirement savings vehicle for most people. But there are disadvantages, and if you choose to save via a different vehicle, I don't see that as the end of the world. The most important thing is that you do save for your retirement. 

So here's a quick rundown on the relative merits of pensions, isas and property.

Property

The British have a love affair with property. That's understandable. Many people have made a lot of money from property. No doubt more will in the future. The biggest advantage of investing in property is that you can 'gear up.' 

Here's an example of gearing up: 

You buy a house for £300,000 with a £100,000 deposit and a £200,000 mortgage. You only pay interest on the mortgage for five years. Then after five years, the value of the house has risen to £500,000. Ignoring interest payments, you've made a £200,000 profit on an initial £100,000 investment. 

That's a cracking return. You can gear up when you invest in the stock market, but it's harder and riskier. 

However, in spite of the above example, I don't think that building a buy-to-let property portfolio is the best way to save for retirement. For starters, I think it's risky to put all your wealth in one asset class (property.)  My wealth is split between property (a flat where I live), shares (within a pension and outside), and cash. I'm happier splitting my wealth like that. I believe it reduces the risk for me.

Isas 

Isas are a great savings vehicle in many ways. You can use them to shelter cash and/or shares from tax and build a long-term savings pot. 

Isas are more flexible than pensions in some ways. You'll never be forced to buy an annuity or move into an Alternative Secured Pension. 

The only real disadvantage for me is that you can withdraw your cash whenever you want. That might seem like an advantage but I think it's good to be in a situation where you can't succumb to temptation to dip into your retirement fund early. 

Isas are now especially attractive for people earning over £150,000 a year as the government has recently fiddled with the tax rules for pension saving for people in this earnings bracket. You're better off going with an Isa if you're earning that much. 

From next April, everyone will be able to save £10,200 a year into an Isa. That's a pretty large sum, but a pension allows you to save more if you wish.

Pensions 

As you've probably gathered by now, I think pensions are the best savings vehicle for most people. I don't say everyone because the latest tax changes have made pensions unattractive for people earning more than £150,000 a year. 

But for the rest of us, you can save money for your retirement in a tax efficient way. And you won't be able to blow your money early. This is money that you can't touch until you're older. I see that as a positive thing, not a disadvantage at all. 

And, of course, if you're in a scheme where your employer makes some form of contribution to your pension, I think there's a very strong case for signing up. Employer contributions turn pensions into a very attractive vehicle indeed.

That's it 

I hope this series has helped a few people make pension decisions. If you're unsure about what to do next, I'd urge you to see a good independent financial adviser (IFA). For many financial decisions, I don't think an IFA is necessary, but it's different when it comes to pensions. 

There's masses more information about pensions in our archives. Take a look.....