It
is generally assumed that the best way to save for retirement is through a pension plan.
But is it? So many people have become frightened, sceptical and confused by stories in the
press about pensioners being robbed by tycoons (the Maxwell affairs), the pension
mis-selling scandals and constant changes by the Government to simplify (sic) pension
arrangements.
No one should ignore the
importance of saving for retirement. When your income stops who will pay the bills? The
grown-up children? The State? Starting to save at the earliest opportunity will ensure
comfort and independence in retirement.
But when the rules for saving in
a pension plan are gobbledegook for most ordinary mortals and when the product literature
is hide-bound with jargon or written by lawyers unintelligibly, how does anyone take the
plunge and save. Add to that the virtual certainty that the costs are too high, who can
you turn to?
Costs
The costs of some financial products like ISAs are much clearer but because ISAs
don’t carry the magic pensions name in the title, people dismiss them as inapproriate
as a savings product for retirement.
netISA, for example,
provides a simple cost comparison calculator which you can visit by clicking on http://www.netisa.co.uk/cgi-bin/advantage.cgi.
This lets you see how much extra you pay over 5, 10 and 20 years. But the costs of pension
plans are often obscured by the most devious means. The most terrifying example of this
was featured in an excellent pensions article on the Motley Fool’s website. Go to:
http://www.fool.co.uk/Bribble/
1999/Bribble990512.htm
No wonder savers and investors
have such a poor regard for the financial services market.
Tax &
Accessibility
If you concentrate on understanding the basic rules of pension plans you will begin to
appreciate the important differences between a pension plan and an ISA. For example, you
get tax relief on the amounts you pay in to a pension plan, but you're charged tax when
you start to take it out as part of your pension. |
With
an ISA it is different. Whereas you don't get any tax relief on your payments into an ISA,
when you want to take your money out it is totally tax free.
Another basic difference is the
degree of access you have to your money when you want it. With a pension plan there are
complicated rules which determine how much and when you can take money out of your pension
plan. ISAs on the other hand give you free access to your money whenever you want it.Where
ISAs and pension plans are the same is whilst your money is contained within the Plan or
Account, it remains tax free.
Investment
Last but not least - investment. With pension plans and ISAs your money is invested in the
stockmarket. What we know from historical records is that investing in equity shares
produces better investment returns over the medium to long term than either fixed interest
securities (Government Bonds) or cash.
But each investment manager
performs differently. Sometimes well, sometimes badly. So, it's impossible to know that
you have chosen a good one.
The growing popularity of Index
Funds is therefore hardly surprising. These funds don't employ expensive fund managers so
the charges are normally much lower. Nor do you suffer when the fund managers you choose,
decide to up-sticks and move to another company.
Index Funds simply give you the
assurance that your money will match consistently the performance of the stockmarket.
For a more detailed account of pension rules,
Debbie Harrison has written on the subject of Pensions and ISAs
for UK-iNvest.com. Happy reading and if you have
any comments or views, do please let us know.
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