Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Pensions central to retirement planning
The Treasury appeared to suffer a moment of post-Christmas brain freeze when it published an infographic detailing the ISA and savings options available in 2017.
The document attempts to guide you through the myriad savings vehicles available from cradle to grave. Under ‘My parents are saving for my future’, for example, it lists Child Trust Funds and Junior ISAs, while Premium Bonds, Cash ISAs, Stocks and Shares ISAs, and Lifetime ISAs feature as options for older savers.
However, in the section labelled ‘We’re saving for later life’, the infographic gives only one option – the Lifetime ISA. Pensions, the most tax-efficient retirement savings wrapper for millions of people, didn’t get a look in.
Some argued this was simply a cock-up from the Treasury, while others warned it was a potentially worrying sign the Government is preparing to sideline pensions in favour of ISAs.
Indeed, former pension minister Ros Altmann went as far as to warn the omission meant pensions are now in ‘mortal danger’ of cuts at the next Budget on 8 March.
Whatever the truth, it’s vital you consider paying into a pension as part of your retirement strategy. To help fill in the glaring gap left by the Treasury document, here are three things you need to know about pensions:
• Pensions benefit from generous tax relief
While the Lifetime ISA pays you an annual bonus of 25% - equivalent to tax relief of 20% - pensions tax relief is paid at your marginal rate. So if you are a higher rate taxpayer, you’ll be able to claim 40% tax relief on your pension contributions – double what is available through a Lifetime ISA.
• Double your money through employer contributions
The Government’s automatic enrolment programme means that, from 2019, all employers of all sizes will be required to offer you a pension through a company scheme. Furthermore, they will have to pay in a minimum of 3% of your salary – free money that isn’t available through any other savings vehicle.
• Pass on tax-free to your loved ones
Pensions are also attractive if you want to pass on your savings after you die. If you die before age 75 your remaining pot can be passed on tax-free, and if you die after 75 it will be taxed at the marginal rate of your beneficiaries.
Front and centre
Whether or not the Treasury plans to tinker with pensions again in the Budget remains to be seen. But as things stand, they should still be front and centre as you plan for a prosperous retirement.