Pension vs savings?

drc

Sorry, I have no clue how pensions work so forgive my ignorance...

Me and my husband are thinking about investing in a pension. We have some savings at the moment and my husband works while I look after our child. However, we are not sure if it is better to put money into a pension or just put money into savings.

What is the difference between putting money into savings each month and putting money into a pension? Obviously, with the pension aspect you get tax relief but apart from that is there much difference? It seems to me that pension funds put your money into investments/stock market and then your pension pot can go up and down like any non-pension investment?

Are there any other positives to putting money into a pension other than savings other than the tax breaks? If one of us were to die would the pension be transferrable to the other one even if it has begun to be drawn?

dunstonh

What is the difference between putting money into savings each month and putting money into a pension?

A pension is just a tax wrapper for the investments you place inside it. A savings account is not a tax wrapper as such. (you can put a savings account into a pension but you cannot put a pension into a savings account. Think of a pension as a container and the savings account as an item you can put in a container.)

It seems to me that pension funds put your money into investments/stock market and then your pension pot can go up and down like any non-pension investment?

If you choose to invest in the stockmarket then you will get the performance linked to that stockmarket. If you choose to invest in property funds you will get investment linked to property. If you choose to put the money into cash then you will get cash returns. There is no requirement to limit yourself just to the UK stockmarket or any other stockmarket. As mentioned above, the pension is just the container. The investments are what you put into that container. You choose what goes into the that container.

are there any other positives to putting money into a pension other than savings other than the tax breaks?

From an income in retirement point of view, which is what pensions are all about after all, then nothing beats a pension (at least looking at conventional options). It doesnt matter if you use savings accounts, cash ISAs, stocks and share ISAs or whatever. A pension is the best option here. Mostly due to the tax relief and tax free growth. However, pensions are not designed for any capital provision (beyond the 25% tax free cash). So, you need to think of them as income provision only if you want to keep it simple.

If one of us were to die would the pension be transferrable to the other one even if it has begun to be drawn?

before commencement, then full fund value, including tax relief, is paid to nominated beneficiary outside of the estate. So, it is totally tax free. When you decide to commence the pension, it depends on what type of income you buy and what options you choose. If you choose 100% spouse then the income dies on second death. If you choose value protect, then you get the unpaid amount of the pension returned as a capital lump sum (minus tax).

Retirement planning should be done jointly. Putting it all in one name is normally the worst thing to do. You should aim to utilise both personal allowances in retirement and not just one. Plus, you can get better annuity rates often as you dont need so many guarnatees in place when you get there.

drc

Thank you Dunstonh, that's really very helpful :beer: