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There is often confusion surrounding pensions and the current economic climate has added to the mystery. Should you bother with a pension? Are they tax-efficient? Are other investments more suitable? We have put together a list of our frequently asked questions about pensions. We hope this answers your questions, but please get in touch if would like to talk to one of our experts!
Essentially, if you don’t save sufficient funds for your retirement, then no one else will do it for you! The current state pension age is already 67 for younger people, and is only likely to rise in the future. If you do not want to work forever, you need to be thinking about setting aside sufficient capital to last you the rest of your life, which for someone retiring at 60 will be another 20 years (on average). Saving for your retirement does not just mean pensions. You probably need other investments as well (like ISAs). However, pensions are the most tax-efficient way of setting aside funds for your retirement.
In a word – very. For almost everyone, pensions are undoubtedly the most tax-efficient way to invest for the longer term. For example, an individual saving £800 into a pension automatically receives £200 in tax relief immediately, meaning £1,000 will be in the pension fund. What’s more, the fund grows free of income and capital gains tax. In addition to this, pensions are now so flexible you can invest in almost anything you like (with the exception of residential property). All of this means that any investments outside of a pension need to generate significantly higher returns, in order to produce the same kind of fund at the end of the term.
Some people get lucky and sell their business for more than enough money to live on for the rest of their lives – however the vast majority don’t. Relying on the sale of a small business is a very high risk strategy in terms of retirement planning. The share price of even the largest companies can be very volatile and smaller companies even more so. Imagine a large fall in the value of your company just prior to retirement – it could mean working a lot longer than you would like, or accepting a rather modest or even miserable retirement. Using a pension can allow business owners to accumulate funds over the years in a very tax-efficient way, which reduces the reliance on the sale of the business in the future. Not only do you reduce risk – you end up paying a lot less tax along the way.
Pensions are just a tax-wrapper in which to hold investments. If your pension is not performing as you would like, it is because of the investments in it – not the pension wrapper itself. Many people make this mistake and do not understand that modern pensions will allow you to invest in a very wide range of assets. People remain in old style pension contracts which may well under-perform, but this should never be confused with pensions themselves under-performing – it just means they need to review the investments they hold within their pension! There are alternative investments to pensions and at Wow we believe a diverse portfolio incorporating pensions, ISA’s, property and your business, is the key to a winning retirement planning strategy.
We work with you to understand the purpose of your business, your lifetime goals and whether your business is taking you where you want to be. As part of this, we will advise you about you personal financial plans, ensuring that you have a retirement plan in place.