Local independent financial adviser, Becky Hammonds of Willow Financial Solutions, explains why pensions are still the most cost-effective savings vehicle.
A recent study by The Institute for Fiscal Studies (IFS) has found pensions to be the most tax-efficient form of savings. The study compared saving in a pension with buying a house, putting funds into an Individual Savings Account (ISA), or investing in buy-to-let property.
Under the auto enrolment programme, workplace pensions require the employer to pay an amount of 3% [minimum] & the employee 5% making a total contribution of 8% in total.
As a result, workers get a significant boost to their pension pots.
Since employers rarely make contributions to employees’ ISA or mortgage, it makes savings in a pension much more attractive relative to other assets.
Property versus pension is an issue advisers are asked about with increasing frequency.
A pension is a tax wrapper you use to save assets or investments in for retirement. Property is an asset class, something you own. In fact, you can put some types of property investments within a pension (though not the home you live in).
Unlike a pension, you pay for property from your ‘after tax’ salary and your employer won’t contribute. Plus, even if house prices rise, at retirement it’s not easy to spend the house you live in, unless you sell, downsize, or do equity release so it’s only a paper gain. Though, a mortgage-free property does reduce your outgoings, which will ease living costs.
A pension on the other hand is money which you should be able to spend when you need it – supplementing any income you get from the state pension – which is more convenient.
So, if you have access to an auto-enrolment pensions, this is the best option because your employer contributes into it. Of course, the best option between property and pension is to try and balance both.
Pensions are a complex area and with so much impacting on finances it is worthwhile securing expert, unbiased advice from an independent financial adviser.
For pensions and investment advice contact Becky Hammonds on 07969 269677 or email becky@willowfs.co.uk
