The Case For Pensions

Pensions in recent times have been getting a bad press and more people seem to be turning to ISAs as an alternative way of providing for their old age. Others with businesses look to them for employment past retiral age or perhaps to a sale of the business or to a family inheritance to pay for their later years.

All of these alternatives are of course entirely valid and have the attraction in the case of ISAs of leaving you in charge of the whole amount of your savings. The capital sum locked up in your pension or annuity, by contrast, is out of your control and even if some kind of draw-down facility is in place with the fund falling into your estate should you die, it is out of your reach during your lifetime and even when you die is only available to your heirs after a steep tax charge of 35% on the funds you have been drawing down income from and any inheritance tax which may arise.

That said, it would seem to continue to make sense to make pension funding some part of your financial plan. The notable benefit of pension contributions is the fact that they are tax assisted. Thus if I invest £3,000 in a Stakeholder pension, this is deemed to have been paid net of basic rate income tax at 22%. The insurance company claims the 22%, that is £846.15 back from the tax man and adds it to my fund. If I am a higher rate taxpayer then further relief at 40%, less the 22% already given (£692.28) is available on the £3,846.15. An immediate return of £1,538.43 on an investment of £3,000 is not bad. Of course, my investment of £3,846.15 is in a tax free pension fund and it can accumulate there, perhaps in a cash fund if I am worried about stock market volatility. Contrast the investment of £3,000 in, say a cash ISA. Although the ISA fund is tax free like the pension fund there is no 50% tax boost at the outset.

Having a pension and a regular core income gives a degree of freedom and flexibility to planning in later life. The next generation may not welcome your attendance at the business and it may in the event not be possible or a good idea to sell it. Or something worse may happen to it ! Your bachelor uncle may decide to squander your inheritance on riotous living and where would you be then.

There is a case for pension planning.