December 08, 2010 at 9:17 PM

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!

Why should I bother saving into a pension?

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.

So just how tax-efficient are pensions?

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.

My business is my pension, do I need a traditional pension?

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.

Don’t pensions perform badly?  Am I not better looking at other alternative investments?

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. 

How can Wow help?

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.

Concerned about your retirement plans? Call 0845 201 1582 to book a Retirement Planning Review Meeting.