Do you need a workplace pension?

According to retirement expert and Head of Retirement Income Options at WEALTH at work, Mark Hewitson, the question is not ‘do you need a workplace pension?’ but ‘why would you not have a workplace pension?’

Mark Hewitson

He said: “You get free money in the form of employer contributions and tax relief on your own contributions, so generally speaking a workplace pension is a no-brainer.”

“However, not all pensions are born equal and on top of that, there are a range of other savings vehicles that suit different aims, so we have to consider which ones are right for us at different points in our lives, when we inevitably have different goals.”

One of the main types of pension is a defined benefit (DB) scheme. This is where your employer promises a set level of benefits on retirement. This can be a retirement income, a lump sum or both. You and your employer make contributions and what you get at the end is guaranteed for life.

Mark Hewitson

"DB pensions are becoming rare, with many of those that still exist now closed to new members. These are the gold standard of pensions because they generally offer a guaranteed income and they take away all the hassle of having to manage your own investments."

“They’re not usually the most flexible savings vehicles around – ordinarily you have to wait until you retire to take your benefits but with tax relief on what you pay in, contributions from your employer and guaranteed retirement income, they provide ‘free’ money and unrivalled security.”

There are often added benefits, like life cover, ill-health payments if you can’t work, and pension payments for beneficiaries after you die.

Hewitson added: “The key is that ‘guarantee’. Outside of a DB pension – and the State Pension, of course – there are virtually no other savings vehicles that give you the assurance about what you will get when you retire.”

Jackie Spencer

Jackie Spencer, Senior Pensions Policy and Proposition Manager for pension strategy at the Government-sponsored Money & Pensions Service, said: The State Pension is the foundation on which to plan for retirement and a pension is a great way to save for later life to have the retirement that you want.”

The other main type of pension is a defined contribution (DC) arrangement. With a DC pension, you build up a pot of money that you can then use to provide an income in retirement.

Unlike DB schemes, which promise a specific income, the income you might get from a DC scheme depends on factors including, the amount you and your employer pay in, how the investments in the pension pot perform and the choices you make at retirement, for example taking cash or buying an annuity (a guaranteed income for life).

Jackie Spencer

Hewitson said: “I’d never suggest that a pension is the only option for savers; it could be complemented by other savings vehicles on your journey to retirement and even after retirement but when we’re talking about long-term options for later in life, a pension should be the first thing we all think about.”

Spencer added: “For most of us, even though it can feel like a long way off, retirement should be a goal that we put some real thought into setting and a pension’s most likely to match our long-term needs.”

However, we will all have other financial aspirations along the way, like buying a house or a car – it’s important to look at making the most of today while still saving for those objectives.”

With significant experience in the Higher Education sector, WEALTH at work is a specialist provider of financial education and guidance in the workplace supported by regulated financial advice for individuals.

The Money & Pensions Service is a new organisation which brings together three government-sponsored providers of financial guidance: The Money Advice Service, The Pensions Advisory Service and Pension Wise. It is sponsored by the Department for Work and Pensions.

Please note that neither USS nor your employer can give you financial advice or recommend a particular financial adviser. You should read the Important information section below to learn how you can find an independent financial adviser that’s right for you and your personal circumstances.

Lifetime Individual Savings Accounts (LISAs) & Individual Savings Accounts (ISAs)

Lifetime ISA (LISAs)

Shorter term priorities might include saving a deposit for your first home, so you might look at a Lifetime ISA (LISA) alongside your pension. For people up to age 40, the government adds a 25% bonus to everything you save up to £4,000 a year – that’s potentially a free £1,000 a year.

When they were first launched, some thought the LISA would be a viable alternative to a more traditional pension, as you can withdraw your money at any time before you turn 60.

However, doing this incurs a penalty charge of 25% on the whole amount, unless you use it to buy your first property under the age of 40, or are terminally ill with less than a year to live, so they are suited to saving towards a first home or as long-term additional savings.

Hewitson said: “There’s definitely a place for LISAs for people under 40 and they’re a great way to create a savings habit that can actually help people with their pension planning. Once they have used the LISA savings for their house deposit, they could carry on that savings habit but put some of it as an additional contribution into their pension savings.”

Spencer added: “Everyone’s circumstances are different and as a general rule, a pension is better than a LISA for meeting your retirement objectives. However, for buying your first home, a LISA could be a valuable savings vehicle for some.”

Traditional ISA (ISAs)

Traditional ISAs have a £20,000-a-year limit (half that of a pension) but unlike a pension, it gives you access to your savings before retirement and there is no tax to pay on any investment growth you earn or money you withdraw.

Hewitson said: “You save from your net rather than your gross pay so you’ll have less money left over each month than you would if you paid the same amount into a pension, but the cash you take from an ISA is tax-free and access isn’t restricted by age.”

There are two kinds of ISA: a cash ISA, which is basically a savings account, or an ISA that invests in stocks and shares – both have a level of risk associated with them.

“The value of any investment funds you have in an ISA can go down as well as up, just as they can in a DC pension like the USS Investment Builder,” said Spencer.

Hewitson added: “Even cash isn’t a risk-free investment due to the effect of inflation on its buying power, however they are relatively easy to understand and easy to access.”

“Whilst a workplace pension benefits from tax relief on contributions, employer contributions and in some cases a guaranteed income (DB) at retirement, an ISA is a different thing altogether, providing an additional savings vehicle suited to more flexible savings needs.”

Property

Some people see property as a safe bet when it comes to providing an income for the future. However, Hewitson said: “This old idea of bricks and mortar providing certainty has no basis in fact. Yes, property can deliver strong returns but it can be an extremely high-risk investment.”

Spencer added: “As a single investment ‘asset’, it is neither diversified (your eggs may all be in one basket) nor easy to turn back into cash if you need to in a hurry.”

To let sign

Then there are the costs associated with letting property – landlord insurance, maintenance and any periods where you don’t have a tenant – and they can mount up.

Not many people can afford to buy investment properties when they are working hard to pay off the mortgages on their first home, so a rental property is out of scope for many.

But if you’re thinking about using your pension savings to buy an investment property, consider how much you actually need in that pension pot first,” said Hewitson.

After your tax-free cash allowance, the rest of your pension pot is subject to income tax; if you need to take a large amount out to buy a property, you’re likely to make a hefty tax payment first, which could reduce the amount of cash available for a purchase."

In addition, mortgage interest tax relief has dropped to 50% for buy-to-let landlords and it will be cut to zero in 2020, and changes to licensing and regulation as well as tougher borrowing criteria could be a turn-off.

And while, in the right circumstances, property can be a way to generate investment gains and/or an income stream, we can’t forget that rental income is taxable and sellers could be hit with capital gains tax, if they want to get access to their cash."

House

Hewitson points out that it is becoming more popular to use your own home to provide you with a retirement income. He said: “Paying off the mortgage as quickly as possible and selling up in retirement might sound like a good plan, but even the most hard-nosed individuals are likely to have a sentimental streak –– and when it comes to selling the family home, it can be very tough, emotionally, to leave.”

Emotional quandaries aside, if using your home to provide cash later in life is an option you’re thinking about, it’s also important to consider that there are a number of ways of achieving this, from downsizing to equity release.

Equity release looks great in those daytime TV adverts but according to Hewitson, this is often the last resort for people approaching or in retirement.

He said: “It’s a genuine funding solution, releasing the equity in your home and living there until you pass away – but as with selling your home, people will need to consider value and the reduction in their estate for any loved ones.”

Remember though, whatever route you consider when buying, selling or accessing equity in a property, there will be fees and costs along the way.

Pensions

According to Hewitson, saving into a pension is probably one of the most sensible financial moves you’ll ever make.

He said: “Why wouldn’t you accept free money from both the government and your employer if it’s available?”

In a DB arrangement, like the USS Retirement Income Builder, this saving also buys members a secure retirement income.

The USS Investment Builder – the DC section of the scheme – gives members the opportunity to top up their guaranteed pension income by investing additional contributions into a range of funds, and since the 2015 pension freedoms, it gives them a range of flexible ways to use their pots even before they retire.

Hewitson said: “As part of an integrated savings strategy which is tailored to meet your individual short, medium and long-term goals, workplace pensions offer a tax-efficient way to look after yourself in the future with DB pensions offering security and DC arrangements providing choice and flexibility.”

Spencer added: “The smart money doesn’t put all its eggs in one basket, but it probably makes sure one of its baskets is a pension. It also takes professional advice when it’s needed, and we have a directory of regulated advisers on our website that allows people to tailor their preferences and choose how they’d like to engage with an adviser.”

Important Information

The content of this article is for information purposes only. It does not take into account your personal circumstances and does not constitute financial advice or a recommendation to make (or refrain from making) any kind of financial decision or engage the services of any particular adviser.

Please keep in mind that past performance is not a guide to future performance, and the value of investments may go down as well as up. Each investment option available to you has specific risks associated with it, and the level of risk varies. It’s important that the level of risk associated with any savings or investments is appropriate for your circumstances.

If you’re not sure about the appropriate level of risk for you or if you have any questions about financial decisions you may be considering, you should seek independent financial advice. You can find regulated financial advice advisors in the retirement advisor directory on The Money Advice Service directory. You may be charged for any advice you receive.

The regulations regarding tax rates and investments may change in the future and are subject to individual circumstances.

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