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Pensions - Are They Worth It?
It is predicted that a single person's state pension will be worth just 106 per week by 2012, which will not be adequate considering inflation and an increased cost of living. Now more than ever, it is recommended that you save for your own retirement, since state pensions will become so small they will be insignificant. But how does a personal pension compare with other financial investments?
More than 14bn is invested in personal pensions every year, with tax relief on these contributions being heralded as the main attraction. In fact only a quarter of the contributions will escape being taxed, meaning upon payout, a pension is worth much less than savers might have expected. An average pension pot in 2012 could be around 34 thousand, which would only equate to an income of around 2, 400 per year depending on circumstances.
Benefits
To make matters worse, many are not inclined to take up personal pension plans since they could affect their eligibility for means tested benefits such as housing benefit and pension credits. Despite claims on the contrary, the government seems to be encouraging middle to low earners not to take up personal pensions for their retirement, by placing people's benefits in jeopardy.
In 2012 the government will introduce Personal Accounts, auto enrolling employed people into pension plans where they contribute 4% of their income, with employers contributing 3% and the government 1%. The Personal Accounts are proposed to encourage everyone to save for retirement, but if they reduce the income and benefits of low to moderate earners then the effectiveness of this policy could be in jeopardy.
Shortcomings - How does it compare to an ISA?
So how does an investment in an independent saver account (ISA) compare with investment in a personal pension plan? Both promise tax benefits, with interest gained on an ISA being completely tax free.
There are two types of ISAs, maxi and mini, and you can save with cash or stock market based investments.
The perceived value of both depend on how you intend to use the money, through income in retirement or access to a lump sum. Whilst contributions to a pension will create a larger sum, ISAs are available as tax free cash at anytime, whereas pension fund rules say only 25% can be taken as tax free cash.
If you are in the higher tax bracket and want access to tax free cash, ISAs allow you to save without being taxed at 40%, and also allows for reduced Inheritance tax liability.
About the Author John McE writes on behalf of The Pensions Regulator, the UK regulator of work-based pension schemes. Working to improve confidence in work-based pensions by protecting members' benefits and encouraging high standards and good practice
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