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Point of View

What comes first – pension or nest-egg?

By Carl Drummond, Wealth Planner


I find it worrying that, as a nation, we’re not resolute about saving into a pension. Admittedly, pensions suffer from complexity and a rather chequered past, but that doesn’t take away from the fact that, as a means of saving for the future, they are hard to beat.
In a recent research study, conducted by Sanlam, we found that 24% of under-45s don’t know the value of their pension, or don’t have one at all. And 33% have less than £10,000 in their pension pot. Worryingly, 43% believe that saving up to £100,000 is enough to fund their retirement, but that would only buy a retirement income of approximately £5,000 a year.

Are we getting our priorities right?

It’s well documented that many people prioritise property over a pension, believing that their home will be their nest-egg in retirement. However, our study also found that 34% of under-45s are counting on an inheritance to help them in later life, and 31% of that cohort say their expected windfall has put them off saving in favour of ‘living in the now’.
Apart from the fact that waiting indefinitely for an inheritance is a risky strategy, it also means that people are losing out on valuable tax incentives every year. Pension tax relief means that for every £1 put into a pension (up to a maximum of £40,000 per year), it costs a basic-rate tax payer 80p, a higher-rate tax payer 60p and an additional-rate tax payer 55p.

Increased flexibility

One of the reasons pensions have proved unpopular in the past is the perceived lack of flexibility. But the rules have now changed, and you’re free to spend your pension pot as you want as soon as you reach 55 years old. You can also take 25% of your pension pot tax-free after you turn 55, either as a one-off lump-sum or as smaller amounts over many years.

Good for estate planning

An often-overlooked benefit of pension savings is that, if you die before age 75, your pension can be passed to your beneficiaries without paying inheritance tax. If you are over 75, then it will be taxed at your beneficiaries’ income tax rate. Many people are now using other savings and investments to fund their retirement, leaving their pension intact for as long as possible.
There are many competing priorities for our hard-earned income, whether it’s buying a property, paying for school fees, or being able to take a nice holiday. Pensions continue to languish towards the bottom of the priority list, yet there are many good reasons why they should be the go-to for all savers. Waiting for an inheritance to fill gaps in retirement finances is a dangerous strategy. I have clients who are in their seventies before their parents pass away. And I also have clients who inherit less than they expect. My advice to anyone – whether in their twenties, thirties, forties or fifties is to take advantage of the many benefits pension savings have to offer. Even if that means something else must give.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.