Five reasons why pensions might still be the best place to save

In today’s uncertain economic climate, with rising living costs and non-linear career paths, understanding how to plan for a comfortable retirement may feel more confusing than ever.

You might be questioning whether traditional pensions still hold the key to future financial security or if alternative options are more worth exploring.

After all, many people have several jobs in their lifetime and an increase in entrepreneurial “side hustles” might make traditional pension planning seem more complicated. Plus, there’s plenty of talk on social media and in the news that is rather pessimistic about pensions, perhaps prompting you to look elsewhere. The changes announced in the October 2024 budget to include unused pension funds in the Inheritance Tax calculation after April 2027 have also generated noise about the relevance of pensions.

However, pensions might still be the best place to save for your future, and for a host of reasons too.

Here are five reasons why you might want to keep pensions in mind for your retirement.

1. You’ll usually receive tax relief on contributions

One of the most compelling reasons to keep a pension as part of your retirement plan is the tax relief offered by the government.

When you or a third party contribute to a pension, the Government effectively adds to your savings by refunding the Income Tax you’ve already paid on the money. For basic-rate taxpayers, this means that a £100 contribution only “costs” you £80.

For higher- and additional-rate taxpayers, you may be able to claim your marginal rate of tax relief – 40% or 45% respectively – through self-assessment. Make sure that your pension contributions fall within your Annual Allowance (£60,000 for most earners) to ensure they remain tax-efficient.

This free boost makes your pension savings significantly more efficient and allows your money to work harder as you approach retirement.

2. Your employer will contribute into your workplace pension

If you’re employed and meet the minimum eligibility requirements, your employer must contribute at least 3% of your salary to your pension. The minimum required amount is 8%, so as the employee, you would contribute the remaining 5% (including 1% tax relief). Plus, some companies offer benefits that include enhanced pension contributions or salary sacrifice options.

You may even be able to discuss voluntarily increasing your contributions through an employer-matched scheme, though this would depend on your circumstances and the flexibility of your employer.

If you’re a business owner and pay yourself a salary, making contributions from your business could reduce the amount of National Insurance (NI) and Corporation Tax your company pays.

All of the above may help your pension pots grow even further.

3. Pension growth is tax-efficient

Once your money is inside a pension, it grows free from Income Tax, Dividend Tax, and Capital Gains Tax (CGT). This means that any investment growth, dividends, or interest earned within your pension pot is not subject to taxation, allowing your savings to potentially compound more effectively over time.

When compared to some other saving and investing accounts, where your gains are taxable, you may be surprised to learn that pensions offer a significant advantage for long-term growth.

These include:

• General Investment Accounts (GIAs), which are subject to CGT
• Non-ISA savings accounts, in which the interest you generate could incur an Income Tax bill.

Remember, when you draw your funds from your pension, you might need to pay Income Tax at your marginal rate. You should also be aware that you can’t currently access your personal pension until age 55, and this age will increase in future.

Read more: Your helpful guide to pension commencement lump sums

4. You’ll have flexibility at retirement

Modern defined contribution (DC) pensions typically offer flexibility when it comes to accessing your savings in retirement. Here are some examples of how you could take your money out.

• Take a tax-free lump sum of 25% from your pension pot and then draw a regular income
• Access your pension flexibly, drawing your 25% tax-free amount in stages
• Buy an annuity, which guarantees you an income for a set period.

These options give you control over how and when you access your funds, allowing you to tailor your retirement income to your specific needs.

Keep in mind that any income you draw after your 25% tax-free amount will likely be taxed at your marginal rate, depending on how much you take out.

5. There’s long-term investment potential

Pensions are designed as a long-term investment, allowing you to benefit from the power of compound returns. Over many years, even small contributions can grow significantly thanks to the reinvestment of returns within your pension pot.

Your provider will usually look after this part for you, although it’s important to remain informed of how your pot is invested and the growth it sees.

While investments always carry a level of risk, a well-diversified pension portfolio can provide a solid foundation for your retirement.

Addressing common misconceptions about pensions

“Pensions are too complicated”

The core concept of a pension is straightforward. Essentially, it’s a long-term investment with a single purpose: funding your retirement.

Though you likely need to consider fees, keep tabs on investment returns, and figure out what your contributions could add up to in a few decades, saving into a pension doesn’t necessarily need to be complicated.

The key is to break your long-term pension plan down into manageable steps and seek help from a Financial Planner. They can help you understand the different types of pensions available to you, how tax relief works, and how to access your funds tax-efficiently in retirement.

“Pension rules change too often”

While it’s true that pension rules can change, they remain a core part of the UK’s retirement system. Although you may encounter certain adjustments or rule changes, the core benefits of saving into a pension are likely to remain.

Your Financial Planner stays up-to-date on regulation changes and understands them in the context of your personal situation. This means they can help you develop a strategy that’s flexible enough to adapt to changing circumstances.

Remember, professional advice can help you stay on track, regardless of any changes in the rules.

Get in touch

If you’d like to discuss your retirement plans or learn more about the benefits of financial planning with regards to your pensions, talk to us today.

If you’re already a client here at PenLife and want to review your retirement plan, contact your existing Financial Planner to learn more. Otherwise, email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax planning.