Faq
What is a pension?
What is so great about it?
It sounds too good to be true, what is the catch?
I knew it was too good to be true!
Ok so why is the tax man being so generous?
But I will have state pension.
What if I die, doesn’t the government or the pension company keep my pension ?
What is an annuity?
What happens to the annuity if I die, then my spouse dies?
Wouldn’t it be better if I saved in an ISA or a property?
What is a pension?
It’s a savings plan that is designed to give you an income in retirement.
What is so great about it?
It is one of the most tax efficient investment plans in the country. In fact it is one of the most generous investments in the world. The reason is that the tax man actually puts money in your pension when you do! So if you are a basic rate tax payer, if you put in £780 in your pension the tax man will also put in £220. This is an instant 22% return on your money! If you are a higher rate tax payer then you get an additional 18% relief i.e. an immediate return of 40%! Furthermore it all grows virtually tax free.
It sounds too good to be true, what is the catch?
You can’t get your hands on all of the money. You can get 25% (i.e. a quarter of the fund) as a tax free lump sum in retirement.
The rest of the money 75% is used to give you an income in retirement. This income is taxed.
I knew it was too good to be true!
Well consider this, where can you make an immediate 40% return on your money? Furthermore if you invest and the pension grows appropriately, you can potentially get all your money back by way of the tax free lump sum. The income then is potentially free money! e.g. say you invested £250pm, the government would have paid in £70.51pm as well so a total of £320.51pm went into your pension.
If say the pension then grew at a rate of 10% per annum. The fund would grow to £397,811! You can take a quarter of this as tax free lump sum i.e. £99452. However you only invested £75,000 over the 25 years. So you got all your money back and a little more. With the balance £298,358 say you got a 5% return, you could get an income of £1243pm before tax i.e. free money because you have had all your money back!
Ok so why is the tax man being so generous?
The demographics of the country are changing. There will be more people in retirement then younger people. So the government is
trying to entice people by saving into a pension so that they won’t have to supplement you in retirement.
But I will have state pension.
Currently the state pension is £87.30pw and £139.69pw for a married couple. What kind of lifestyle in retirement could you have on this?
What if I die, doesn’t the government or the pension company keep my pension?
This is a common misconception. If you die before taking your pension then the whole fund goes free of tax to your next of kin!
If you die during retirement then it depends how you have set up your annuity.
What is an annuity?
It’s like a reverse mortgage. Your lump sum of money is then converted to an income. You have a number of options in retirement e.g.:
You can set up the annuity so that if you die your spouse/partner or family gets half of your pension until they die.
You can set up the annuity so that it increases every year.
There are lots of options, with every bells and whistles you add the pension reduces.
What happens to the annuity if I die, then my spouse dies?
It depends, if you both die soon after taking your annuity then the pension company keeps the money. The trick is to outlive the money!
Wouldn’t it be better if I saved in an ISA or a property?
If you invest in an ISA or a property then the tax man doesn’t add cash to your investment. In fact an investment property is probably the least tax effective investment. For a start you pay stamp duty on purchase. Then you pay tax on any profit you make on the rent. If you sell it then you pay capital gains tax. When you die it adds to you estate and will be potentially be liable to inheritance tax. I am not saying that you invest all your money in a pension. In fact for a successful retirement you need to have 3 strategies.
1. You need a pension. This will pay your overheads i.e. food and bills in retirement provided you paid in enough. But I have never met a pensioner who says that they get too much pension!
2. You need investment. This can be in the form of cash, shares, bonds, ISA’s national savings etc. These will provide you with the goodies like holidays and Christmas gifts to children and grandchildren.
3. You need an investment property(ies). This will supplement your pension and leave a legacy for your children and grandchildren. |
