A common reason for saving has always been to ensure that we’re ‘financially secure and comfortable’ when we retire. The steady rise in life expectancy means that more of us can look forward to a long and more financially demanding retirement than our forebears. It means we have to ensure we have adequate income to both meet our needs and continue to enjoy the lifestyle we may be accustomed to. If we’re going to have to save for the future, we need to make sure that those saving schemes deliver the best possible return.
Although we could put our money into a savings account, as many people still do, growth in its value will depend on interest rates. When interest rates are high, our savings will grow – when they’re low, our savings will stagnate. Even worse, if the interest rate is less than the prevailing inflation rate then the value of our savings will deteriorate in real terms. And then there’s tax. Unless we put our money into an ISA, we’ll be taxed on the interest our money earns – if interest rates are low, we may as well put the money under the mattress.
We need an alternative strategy. Instead of relying on interest rates to increase our savings, we need something that may – potentially – give a better return. ‘Investment’ is the obvious choice as it shares a fundamental concept with ‘saving for retirement’ – both should be considered on a long-term basis.
Pension schemes are long-term saving schemes that are probably the most tax-efficient form of saving. To start with, contributions into the scheme benefit from tax relief, something which offers a huge advantage over any other form of savings plan. In addition, our money grows tax efficiently while it’s invested and, when the time comes to use our ‘pension pot’, we can usually take a portion as a tax-free lump sum.
Although most pension schemes use investment as a growth mechanism, as a ‘private’ investor, we’re often limited as to how we can influence what we eventually get. In fact, of the three broad types of pension, realistically, we can only influence and manage one of them.
- The State Pension
It’s long been acknowledged that the State Pension is too little to live on which is the reason why there is so much government emphasis on supplementary pension schemes. As a potential investor, there’s little we can do to influence what we eventually get when we retire apart from making sure that we keep up to date with our National Insurance contributions and maximise the number of qualifying years we have. (See our guide to State Pensions.)
- Workplace pensions
The great thing about these is that our personal contribution is generally matched by a similar contribution from our employer and this means our pension pot grows faster. On the other hand – and quite understandably – employers tend to err on the side of caution when it comes to investing the money. In reality, there’s little we can do to influence what we receive from a workplace pension scheme other than to maximise the contribution we make. (See our guide to Workplace Pensions.)
- Private pensions
This is an area where, as investors, we have free rein and can directly influence – for better or for worse – the pension we’ll eventually receive. Private pensions include personal pension plans, stakeholder pensions and SIPPs (Self-invested Personal Pensions). It’s important to stress that, although labelled as a ‘pension scheme’, there’s no obligation to use the fund for that purpose – effectively they are just very tax-efficient saving schemes. (See our guide to Private Pensions.)
Although most people saving into a pension scheme are saving for their retirement, the ‘pension freedom and choice’ reforms introduced in Budget 2014 relaxed any government expectation about what we have to do with our workplace pension fund. Historically, the fund had to be used to buy some form of annuity, but the reforms changed that. Now, once you reach the age of 55, you can cash-in your pension fund and do what you want with the money. (See our guide to Pension Freedom.)
However, there’s no such thing as a free lunch! If you do decide to cash-in either a private pension or a workplace pension you need to be aware of the tax implications. Whatever you take out will be treated as earned income so, if you cash-in the entire fund you could receive a hefty tax bill which may undermine the scheme’s value. (See our guide to Pensions and tax.)
Pensions are, unfortunately, incredibly complicated so it’s wise to have a good financial adviser on hand to help you navigate your way around the various pitfalls.
How can One Financial Solutions help you?
“It’s not about timing the market, it’s time IN the market that counts.” is another of Warren Buffet’s legendary quotes. Apart from re-emphasising that investment should be treated as a long-term venture, it also underlines that ‘being in the market’ helps build the all-important store of knowledge and experience you need to be successful – something you can’t pick-up quickly.
One Financial Solutions is here to help you. Our advisers are experts who live and breathe investment – it’s how they make their living. They’ll take time to talk to you about your financial objectives, the level of risk you’re prepared to accept and any investment preferences you may have. They’ll provide expert guidance and, once you’re happy to go ahead, they’ll put everything in place and keep you updated for the duration of your investment.
So, if you’re looking for help with any aspect of investment, please call us on 020 3714 9565 or ask us to call you by sending an email to email@example.com.