Pensions Versus Savings

andykolo

Just started with Health Service pension scheme and told Superannuation is almost the best pension plan u can have. But had a conservation with someone who is close to retiring and he says i might be better off just saving the money i would put in the plan.

How true is it ?

margaretclare

Hi

In the NHS scheme, is it still the case that you put in 6% and the employer puts in another 6%?

If so, you'd be an idiot not to take this opportunity. You're effectively saving 12% of your income every month, the only difference being that only 6% of that is yours!

Where are you gonna find a savings scheme to match that? If you don't join, you're going to be chucking away free money (i.e. the employer's 6%).

Also, there is also the possibility that you won't save, or even if you do, the money will be too easy to get at and there's always something you want!

Best wishes

Aunty Margaret (ex-NHS)

Ian_W

Andy,
Whoever told you that is ... "a right plonker", as Del Boy would say.

Not only, as Margaret says, is the NHS giving you money by also making a contribution - but that nice Gordon Brown :eek: is too!! The money you pay into your NHS pension scheme goes in before tax is deducted so it's worth 22% [40% if you're a consultant or senior manager] more than if you received it in your salary cheque!!

"Plonker" takes his cash and pays tax on it, puts it in a savings account and ... pays tax on the interest!! When s/he retires they have a small [after paying tax & not having the NHS make an employers contribution] lump of money that bears no relationship to their salary on retirement. :mad: Whereas you have a lump sum and an income based on your final salary.

Most private sector workers would bit your hand off for a pension scheme [though certainly not NHS pay rates!!] like that. :beer:

dunstonh

But had a conservation with someone who is close to retiring and he says i might be better off just saving the money i would put in the

What a wally he is then

Cannot add anything else really to margaretclare's excellent response. Actually, perhaps one more thing.. the NHS pension also includes some life cover.

EdInvestor

andykolo wrote:

Just started with Health Service pension scheme and told Superannuation is almost the best pension plan u can have. But had a conservation with someone who is close to retiring and he says i might be better off just saving the money i would put in the plan.

How true is it ?

It's not true when we're talking about a Governrment backed final salary pension scheme with a big contribution of free money from the taxpayer, like the NHS one.

But there are a lot of other pensions where it could be true.

Many people prefer saving money in a tax free ISA over a pension because it is much less restrictive. The key deciding factor is usually the free money from the employer.If there isn't any, and you are not a higher rate taxpayer, an ISA will probably be better than a pension.

CTT_2

I have a final salary scheme pension and I pay 6 percent and my employer pays 11 percent. Also I pay AVC's. If you just put this into an ISA or just a savings account I would obviously be throwing at least 11 percent away. How can that make sense!

Ian_W

I think if you read what Ed said it was that an ISA made more sense only if there is NO employer contribution.

However, whilst I'm no expert and happy to be proved wrong, everyone one who contributes to a pension gets "free money from the taxpayer" because the contributions are made pre-tax.

To pay £3000 into an ISA you have to earn £3660 at basic rate or £4200 at higher rate. To pay £3000 into a pension you have to earn just the £3000. Pretty high price to pay for "flexibility", IMO. Or am I missing something?

EdInvestor

Ian_W wrote:

Or am I missing something?

I think so

Pensions are tax free on the way in, but you pay tax on the income you receive later (except for the 25% tax free cash).In addition you cannot ever get access to the capital, and the income you can take is limited by the Government.

With ISAs you contribute out of tax paid money, but pay no tax on either income or capital you take out later,all of which you can access at any time.

homersimpson_3

my friend has works pension and is buying added years to he can get max works pension. this pension is contracted out so he will get additional state pension. in next 6 months he would have paid off mortgage and built up enough emergency savings in instant access isa and is considering next step.
he would end up with about 500 'spare money' each month after paying all bills/food/added years into pension etc . should he continue to put 3000 each year into isa where at best he will get 5% or 234 into stakeholder pension to take account of 22% extra gov puts in. he wants no/litle risk. he looked at some stakeholder pensions providers (e.g. standard life, norwich union etc) and they have funds with minimum risks (e.g. cash deposits). some of these funds however are only paying about 3% returns and he could get more than that in a building society account but then he would not have the extra 22% from the gov that stakeholder pensions provides. he doesn't trust financial advisers much- got his fingers burned with endowment and it has taken him years of scrimping and saving to get out of mess. he is not convinced they know much more than him. what's the answer?

margaretclare

EdInvestor wrote:

With ISAs you contribute out of tax paid money, but pay no tax on either income or capital you take out later, all of which you can access at any time.

Ah yes, there's the rub, isn't there? 'You can access it at any time'.

While I would agree that ISAs are a valuable part of your savings portfolio (see Martin's 'Money Fountain' idea) I wouldn't like to throw away the employer's contribution - effectively extra cash - and also, over a period of years, with things like credit card debts, house purchase, car purchase, holidays, weddings, there are just too many temptations to access those ISA funds long, long before retirement.

Yes, you do pay tax on pension income (but tax allowances are higher for 65+). There's also the government's 22% for stakeholder plans - I'm 70 and I'm still paying into a stakeholder until I'm 75. At times it has been tempting to stop it, but I really do like the 22% which is added to every pound that I save, and I can take another 25% tax-free in 5 years' time.

Aunty Margaret

dunstonh

In addition to the tax relief, there is also the annuity rate which is generally higher than the interest rates you can get at this time. A guaranteed income, increasing annually, for life at rates higher than savings accounts which can fluctuate can be very desirable when you are calling it a day with your working life.