You don’t like pensions? It’s time to think again


Rory Brand

Rory Brand

Financial Planner

14 July 2018


As a Financial Planner on more than one occasion a client has said to me “I don’t like pensions” and my question is “why?”.

I have heard a variety of reasons but most often it is having had a poor experience or a past generation not believing in pensions becomes a mantra for future generations. Most of the time though once we have talked through the benefits I normally find opinions can change. 

Quite simply for those who can afford to, saving in to a pension can be one of the most advantageous financial planning tools you have at your disposal. Not only are pensions great for reducing tax liabilities they can provide an income source in retirement and they can help with succession planning and inheritance tax planning.

Historically, pensions have provided an income in retirement and for most people this is still true but, with pension freedoms, the way in which pensions are utilised is changing. In the past a pension could have been the first savings pot you would have turned to for income in retirement but now it may be the last. 

Quite simply for those who can afford to, saving in to a pension can be one of the most advantageous financial planning tools you have at your disposal. 

Rory Brand

Financial Planner, JC Wealth

Who should contribute to pensions? Arguably, everyone under the age of 75. When you pay in to a pension you receive tax relief at your marginal rate. Those without an income can even contribute to pensions, up to £3,600 a year with a net cost of £2,880, an instant 20% uplift.

But those who benefit most are higher earners for whom paying in to pensions can have other valuable benefits, such as regaining your personal allowance or for families in receipt of child benefit, pensions can be used to ensure you retain the child benefit when a parent is earning over £50,000 per annum.

A drawback to pensions is that you cannot access a pension currently until the age of 55. When you access a pension you will normally receive 25% tax free, often referred to as tax free cash and the remainder will be taxable as earned income.

If you contribute to a pension as a higher or additional rate tax payer and then draw your pension as a basic rate or non-tax payer you will receive significantly more in return than your contributions without having to rely upon growth.

The biggest change though, is that for some, pensions are not drawn any longer and may never be. Pensions can be used as a very efficient way to pass money to the next generation. Pensions will pass on free from inheritance tax and in some circumstances the next generation may be able to draw the pension free from income tax.

More and more we are seeing pensions being used as a tool to help with succession planning. With our agricultural clients we tend to see the farming assets pass down generations but not always in an equal split to the next generation. For the children who may not be benefiting from the farming assets they could benefit from their parent’s pensions. This will leave you in control in your lifetime should you require to access the funds, while knowing you can build up significant wealth within a pension without having to be concerned about the impact of inheritance tax.

As pensions benefit from these tax privileges almost all will find that they are one of the most important planning tools you have at your disposal. Pensions may not necessarily be used by all to provide an income in future but for those that need to consider succession planning and inheritance tax planning, there are a lot of reasons to like pensions.

Disclaimer: While all possible care is taken in the completion of this blog, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained in this blog. Nothing in this blog constitutes advice to undertake a transaction and professional advice. Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.