Pensions Pros and Cons

Pros and Cons of Pensions

Pros

It’s essential to save up for your retirement.

A pension is the most obvious and best way for normal people to do this because of the major tax benefits you get.

It’s also a “standard arrangement” that’s managed for you and relatively easy to keep your eye on.

If anything goes wrong you are much more likely to be covered for compensation than with less common methods of retirement planning.

You get a major boost to your savings in that the Inland Revenue effectively gives you back all the tax paid on the money you’re saving.

Also your pension fund is free of capital gains tax. If you tried alternative ways of saving you would normally be subject to taxes which would knock you back significantly.

Furthermore your savings are invested leading to dramatic benefits from Compound Interest.

Cons

Assuming the pension you choose is flexible and has reasonable charges (eg along the lines of a Stakeholder pension) a major disadvantage is having your money locked away until you retire (from 50+). There’s no way out. However this could also be seen as an advantage. At least you won’t be tempted…

The most commonly discussed problem, at the moment, is being forced, by law, to buy an annuity when you retire. However, if interest rates are low, this can work against you.

For example in 1990 a pension fund of £50,000 could have bought you about £6,300 a year compared with the £3,500 – or so – a year you would have got in 2001.

However there’s constant talk that the government may eventually scrap annuities for a better system.

Another problem is that there’s been a high drop out rate from pension plans in the past.

If you stop your payments / contributions too soon and the charges were front-end loaded then you would probably lose a significant percentage of what you’d saved. See the cost of abandoning your pension. However many pension providers have now stopped this practice thanks to the Stakeholder pension.

Also: your pension could be affected if inflation is high. In the early 1980′s average wages were £9,500. A prudent pension of two-thirds final salary would be £6,400. But if it wasn’t inflation proof then it doesn’t look great compared to Today’s average full time wage of £17,000.

However your pension fund itself should stay ahead of inflation – if it’s invested in things like property and shares – which it would usually be.

After you’ve retired, it’s possible to shop around and get an inflation proof annuity – though like other features this will cost you for the privilege.

Pension Basics Contents