Client questions
There are many financial issues facing us all in the UK today; an ageing population, pressure to consume, insufficient saving, incomprehensible financial products and services, whilst to top it all there are very few places to turn for truly impartial advice.
This section of our website aims to answer some of the questions we are commonly asked by clients. We hope you find what you need, but if not why not have a look elsewhere on our site or e-mail us your question using our enquiry form.
Q - When should I start a pension?
There is a general misconception that retirement planning means paying money into a pension. The key to a financially secure retirement is simply having enough money. It doesn’t really matter whether it is in a pension, an ISA, an investment portfolio or even cash under the mattress, although we wouldn’t necessarily recommend the latter!
In addition, paying down a mortgage is just as valid a way of saving for retirement as a pension or an ISA, but many of us forget to think of it in this way.
If you took a mortgage interest rate of, say, 6% p.a., a higher rate taxpayer would be getting the gross equivalent of a guaranteed 10% return by overpaying the mortgage. A basic rate taxpayer would be getting 7.5% p.a. Very few investments offer you that level of consistent, guaranteed return!
Pensions can, however, offer excellent tax planning opportunities for certain individuals.
The first place to start should be to double check how your employer-sponsored pension works if you have one. On top of the standard level of contributions, many employers will match any payments you make up to, say, 5% or 10% of salary. That's a fantastic benefit (free money basically) and well worth taking advantage of. Take some time to acquaint yourself with what is on offer.
Speak to your HR department as a priority as we have met a number of people who have missed out on free pension contributions from their employers because they weren’t aware of what was on offer.
The most efficient way of saving into a pension is to receive higher rate tax relief on your pension contributions but to only pay basic rate tax on your retirement income. When you bear in mind that you can currently take out up to 25% as tax free cash at retirement as well, you have a tax break that is very hard to ignore.
What puts some people off pensions is that by 2010, it will not be possible to take benefits before age 55 which is a long time to have money tied up. This is therefore a good reason to adopt a multi-faceted approach to financial independence planning.
As with everything in life, it’s best not to have all of your eggs in one basket and to try to look at the bigger picture when creating a financial planning strategy. It might seem counterintuitive to delay pension contributions – the normal story is that you should start early to benefit from year on year of rolled up returns – but such a strategy can work really well in certain circumstances.
Evolve - November 2009
