Demystifying Pensions
Why do Pensions get a bad rap? I think the honest answer is that after decades of the government tinkering with pension legislation we have been left with countless rules and regulations that few people understand. This lack of knowledge scares people and generally where you have fear, you have distrust.
So, let me try to dispel the myths. Pensions are really not the enemy, and I would argue that it is perhaps our psychology to pensions which creates the biggest problem.
Imagine you walked into a bank to deposit £1000, the next week you checked on this account to discover that your balance now stands at £1250, how would you feel? Bemused, is it a banking error? Delighted as you have more money to spend? Either way, invest £1000 into a pension fund and that is exactly what happens, thanks to the generous tax incentives offered by the government. And the good news doesn’t stop there, if you are a higher or additional rate taxpayer you can claim a further 20% or 25% tax break via your annual tax return. Your pension fund will also grow free of taxation and when you do decide to retire you can also choose to take a lump sum of up to 25% of the fund value as a tax-free lump sum. All positive so far, I hope you agree.
A personal pension is nothing more than a tax efficient savings vehicle that ultimately has a restriction on when you can start to draw on your funds, currently age 55. If you find it difficult to save, then this discipline can almost certainly work to your advantage as it will prevent you dipping into this pot, throughout your working life. As the state pension age continues to move further into the future it is imperative that we understand our pensions, how they are performing and what levels of sustainable income they are likely to provide us with in retirement.
State pensions alone are unlikely to provide us with the lifestyle we would like in retirement. Data from Age UK suggests that there are currently 1.9 million pensioners in the UK living in relative poverty. This is a scary statistic, and it could be likely to increase as more and more people delay commencing pension contributions.
So, when I hear the words “pensions are rubbish” or “my pensions do nothing for me”, I often challenge people as to why they feel this is the case? Rarely is the pension scheme rubbish. The reasons they are often viewed as such is often down to poor investment returns. Many people are guilty of giving a cursory glance to their pension statement each year before filing it away, the investment return of their pension funds is rarely reviewed, therefore perhaps it comes as no surprise that many people express dissatisfaction with their pension funds.
Let’s put this into context, imagine you are paying for a gym membership each year, each time you visit the gym you find that the equipment is often broken and needing repair, the premises are often dirty and are obviously not being maintained, the fitness instructors are disengaged and have no interest in helping their clients to push their own personal fitness boundaries, no one is on hand to provide guidance to you around how to use the equipment. My question is, would you remain a member of this gym or would you look for a new gym which met your needs?
I’m guessing the answer to the above is simple, people would not pay a membership fee for a facility with sub-standard performance, they would almost certainly find a new gym.
Why then do some people make contributions to a pension fund without looking at the performance of the funds they are invested in? The same rules apply ladies & gentlemen, why continue to pay into something unless you are clear that you are getting value for money? I understand that the investment world is a tricky one and it is probably one area where it is best to seek expert guidance from professionals regarding which funds you should invest in to help you to meet your retirement objectives. Pensions are often our largest asset along with our properties. You wouldn’t buy a house without seeking expert legal guidance, so why put your retirement as risk by continuing to invest in pension funds without understanding how they are performing? Surely it would be better to pay for help and guidance from a qualified financial adviser to give you the peace of mind that your pension funds are performing well and are likely to provide you with your desired lifestyle in retirement.
I will leave you to ponder on the famous quote from Mahatma Ghandi “The future depends on what we do in the present”.
Coming Soon: Free Retirement Seminars – dates to be published shortly