Are pensions still a worthwhile investment?
12 Dec 2024
The 2024 Autumn Budget announcements made by the Government have caused many to rethink their pension strategy and whether these are still a relevant and useful long-term investment.
You may be wondering, for example, whether contributing to a pension (either through work or privately) is the most tax-efficient strategy considering the alternatives – like stocks, shares, etc.
It is a difficult decision, especially when making the wrong choice could result in your financial and tax position being exposed to unnecessary risk and poor efficiency.
Advantages of pensions
Pensions offer almost unmatched tax advantages, with contributions attracting tax relief at your marginal rate.
This means a basic rate taxpayer contributes £80 for every £100 invested, while higher rate taxpayers only need contribute £60.
Investments within pensions also grow tax-free, sheltered from Income Tax and Capital Gains Tax, allowing for greater compounding over time.
Workplace pensions are particularly beneficial, with employer contributions boosting your savings, effectively providing “free money” towards retirement.
Flexible access options from age 55 (rising to 57 in 2028) further enhance their appeal, offering lump sums, drawdown, or annuity options tailored to your needs when your employer agrees to ‘flexible retirement.’
Disadvantages of pensions
The primary drawback to pensions is accessibility – funds are locked away until pension age, limiting liquidity for emergencies.
Most investments in pensions are also subject to market fluctuations, meaning your pot’s value can rise or fall, especially in the short term.
Equally, fees can erode growth if not monitored, and withdrawal beyond the tax-free lump sum is taxed at your marginal rate, potentially increasing your tax bill.
Remaining contribution limits like the Annual Allowance can also restrict how much you save tax-efficiently.
If you are considering pensions as an investment vehicle, it is worth bearing in mind that they can have drawbacks – especially if the political sphere makes changes to their nature and utility.
However, broadly speaking, we still recommend them in most instances – at least as a part of a wider investment strategy.
If you are looking for more detailed advice, please get in touch with our expert financial advisers.
