Posted on 01 March 2012.
Rarely a week goes by without us getting a pensions-related press release. And most of those releases will include frightening stats on the number of us not saving for a pension.
Now pensions are going to be big news later this year, because the government is introducing something called auto enrolment.
This means if you work for a company offering a pension scheme then you are automatically enrolled into that scheme without any active decision on their part.
Basically to quote the Pensions Advisory Service: “many workers fail to take up valuable pension benefits because they do not make an application to join their employer’s scheme. Auto-enrolment is meant to overcome this”.
Now if you don’t work for an employer offering a pension or you work for yourself then you can set up your own pension.
(Warning: although we do know a bit about finance we are not specialists so if you are thinking of starting a pension you will need to get independent financial advice.)
But for some of us pensions might not necessarily be the best option.
According to one adviser if you are in your 40s and have not started a pension you may be better off putting your money into an ISA, or individual savings account.
Now the only problem with an ISA is that you can withdraw the money you put in. With a pension it has to stay there, so you are not even tempted to spend it.
But the problem with starting a pension in your 40s and older is that you may not be able to save enough to retire at 60.
Darius McDermott, an investment and pension specialist with Chelsea Financial Services explains:
“A pension is an investment that is not taxed on its way in. So any money you use from your salary to pay into your pension is not taxed, so if you are putting £100 a month in and you are taxed at 22% you get an £22 back – money you would otherwise have paid in tax.”
But while you get the tax free on the way in while your pension fund is growing it is still going to be taxed. Pensions used to be able to claim back tax paid on shares, but in 1998 that benefit was removed.
And if your pension is healthy enough to allow you a retirement income of £8,000 or more, then you have to pay tax on that too.
“The benefit of using an ISA is that you can do not pay tax on the money while it is growing in the ISA account and you don’t pay any money once you take it out of the account. Unlike a pension.”
So what should you do?
1) Find a decent ISA, you can do your research on websites like Moneyfacts
2) Try and use your maximum ISA allowance, which is £10,680 each year of that you can put £5,340 in cash or choose to put the whole amount in a stocks and shares ISA.
3) Leave it there. Darius reckons that if you are prepared to ride out the stockmarket highs and lows and use your full allowance you could have over £500,000 saved in 20 years.
Remember to seek independent financial advice, this article is only intended as a guide and of course you can lose money investing in shares.