4 quick reasons why you should reconsider a pension

Tuesday, 9 August 2016

4 reasons to reconsider a pensionPensions have been in the press a lot recently (not always for the right reasons) and this has bred a bit of uncertainty as to whether they’re still a wise investment. The concern is understandable - it hasn’t been the most customer-friendly industry - but just like in banking, new brands are beginning to challenge that, and there’s still some solid financial reasons why putting money into a pension can be wise. With that in mind, here’s four quick reasons why it might be time to reconsider a pension.

Employer contributions are becoming compulsory

Under the new auto-enrolment pension rule, all employers will now have to match 1% of your contributions rising to a minimum of 3% in October 2018. As an added perk, and to encourage further saving, some employers will also offer increased matched contributions over the minimum threshold. As such, the more you save the more your employer will have to pay into your pension pot.

The government treats you to tax relief

The government encourages people to increase their savings by giving 20% tax relief on pension contributions; up to £40,000 or 100% of your salary – whichever is lower. This means that for every £8 contribution, the government gives you £2 in the form of tax relief, making it a £10 contribution. Most pension providers claim this tax relief on your behalf and deposit it directly into your pension pot. For people that are in a higher tax bracket, a further 20% tax relief can be claimed in your tax returns. In addition, when you turn 55 or when you decide to retire, you can withdraw up to 25% of your pension pot tax-free. Any further income over your personal allowance (currently £11,000) is subject to normal income tax rules.

A good plan delivers diversification

With Brexit came a devaluation in pound sterling which caused havoc across the stock market, with some investment products and sectors affected more than others. Property is a good case in point - post-Brexit, people lost thousands of pounds overnight.

This illustrates - particularly for retirement planning - the importance of having a diversified portfolio, such as one that spreads your risk across different assets (equity, cash and bonds) as well as geographical locations. Most good pension plans offer a diversified portfolio which will be less averse to market fluctuations, leading to a more stabilised investment.

You won’t pay capital gains tax on compound returns

The earlier you start and the more you top up your pension, the more you’ll be able to benefit from compound returns. Compound returns are earnings that have been generated from reinvesting returns over and over again. Unlike other investments that will have to pay income tax on these earnings, pensions are not subject to capital gains tax.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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