A Brighter Outlook
The property market may be floundering at the moment, but the outlook for pensions appears decidedly brighter, says Nina Montagu-Smith
According to the Council of Mortgage Lenders, people with mortgages have on average only 45 per cent equity in their homes. With the recent downturn in the property market, many people are coming to realise that they may be over-relying on their homes to provide a nest egg for retirement.
Although pensions received bad press a decade ago with the near-collapse of Equitable Life and allegations of mis-selling, the new rules introduced in 2006 mean a pension is now one of the most straightforward, tax-efficient ways of saving for the future.
The Government is keen to encourage people to save more. In 2012, its intention is to introduce new personal accounts for employees, into which they will automatically be enrolled by their employers. However, the contribution ceiling will still be just £3,600 a year, which may be inadequate for many people.
Fortunately, there are plenty of generous incentives to use pensions. It is possible to invest, and to receive tax relief on, 100 per cent of your income - up to a maximum for this tax year of £235,000 - across as many pension products as you wish. Contributions within this limit attract tax relief at the highest rate, and you can take benefits any time after the age of 50, rising to 55 in 2010, of up to 25 per cent of the fund as tax-free cash, converting the remainder into taxable income, usually by buying an annuity. If, however, you invest more than the annual limit into your pension, tax will be charged.
From October 2008, the Government has allowed pension holders to transfer protected rights policies to self-invested personal pensions (SIPPs). Protected rights policies were set up to enable people to opt out of a second state pension.
If you hold a SIPP, or some other types of personal pension, you can invest in a wide choice of qualifying assets, including commercial property, equities, bonds and investment funds. You can also invest in investment trusts, unit trusts and open ended investment companies (OEICs), where a fund manager manages a portfolio of shares on behalf of the investor.
Equities are particularly well suited to long-term investment, which makes them fitting for pensions. Share prices have fallen in value during the past 12 months or so, which demonstrates the fact that equities can fall in value as well as rise in the shorter term but, again, you will currently be able to buy at a lower price with a view to longer term potential gains.
The benefit of cash in a bank account is that your capital is generally secure and readily available, but equity investment may better protect your savings from the effects of inflation than cash or bonds. As Chris Fletcher, head of retail investments at Baillie Gifford, says: "You may be saving for your retirement over 20 or 30 years and you want your savings to reflect growth in the real economy. Investing in equities is a way to do this."
"Over the last 100 years, equities have nearly always beaten cash over any given 18-year period. In times of higher inflation, like now, prices of company products have tended to reflect inflation. This means that profits, and share prices, have tended to keep their real value better than cash or bonds."
Past performance is not a guide to future performance. You must remember that a pension fund may not be able to provide the pension that you expect at your chosen retirement date. Investments you make in a pension and any income from them can go down as well as up and you may not get back in the form of pension benefits what you originally invested. Tax reliefs and rates may change at any time and will depend on your individual circumstances. You should seek professional advice if you are unsure whether a SIPP, or an alternative form of pension provision, is suitable for you.
Nina Montagu-Smith is a regular contributor to The Scotsman and the Daily Telegraph.
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