Getting started

JeffMinter

I'm 22 and just started my pension contributions. I've been looking into the best long term savings-investment options for the future, and I'm not sure which is the best.

Say I put £100 every month into a pension plan, topped off with employer contributions making it to £200 total - will this, coupled with the tax break (20%) - gain better returns over my career (40+ years, hopefully!) than a high interest savings account above inflation rate or shares that, (for the sake of convenience) on average produce 10% gain per year.

On first impressions it seems pensions wins hands down; tax breaks AND double your contributions. But I'm most concerned with inflation. The more time passes, the more my money sitting in that pension is decaying from it; the most affected being my first contribution will be a mere fraction of what it is worth today, and far less so with my last contribution.

Compare that with compounded growth on ALL of the investment in a savings account or shares, and on subsequent contributions, do those extra perks still make pensions far more financially sound?



Also, am I allowed to take out a pension if I have passed the retirement age but still working (both for private and state pensions)? The way things work I'm guessing no, but surely that's a breach of the very idea of a pension i.e. refusing to give back the funds that someone has put into for the majority of his life, and expecting back at a predetermined age?

EdInvestor

JeffMinter wrote: »

Say I put £100 every month into a pension plan, topped off with employer contributions making it to £200 total - will this, coupled with the tax break (20%) - gain better returns over my career (40+ years, hopefully!) than a high interest savings account above inflation rate or shares that, (for the sake of convenience) on average produce 10% gain per year.

Obviously if you have 220 quid going in every month @ 10% growth a year you will end up with more than if you have 100 quid going in @ 6% growth a year.

On first impressions it seems pensions wins hands down; tax breaks AND double your contributions. But I'm most concerned with inflation. The more time passes, the more my money sitting in that pension is decaying from it; the most affected being my first contribution will be a mere fraction of what it is worth today, and far less so with my last contribution.

Money is money: inflation affects it whether it's in a pension or a savings account in exactly the same way. The real growth of your pension will be 6% if inflation is 4% while the real growth of your savings will only be 2%.

But note that you are taxed on 75% of a pension in payment whereas cash savings (or investments) in an ISA won't attract tax relief, but will be tax free on exit.

Also, am I allowed to take out a pension if I have passed the retirement age but still working (both for private and state pensions)?

Yes, up to the age of 75.

Ian_W

Jeff,
I think you're misunderstanding what happens to the money that goes into your pension.
First off as you've recognised it gets boosted by 120% courtesy of your employer and HMRC but then it seems you think it just lies there just gathering dust and being eroded by inflation for forty-odd years until you retire.
Your pension money if it's in a money purchase scheme [which it sounds like - given your employers matching contribution] is invested usually in stock market based funds so that it also grows much like the shares you've mentioned and in all probability ahead of a cash savings account.
Depending on the type of scheme you may well have a variety of choices as to how and where your pension money is invested but if you don't exercise any choice it will probably go into a default balanced managed fund, which with so long to retirement is probably not the best place for it.
You should find out what type of pension it is and what investment options you may have. If you post the details I'm sure there are folks more knowledgeable than me about investments who will give you some suggestions about the right mix for your age and tolerance to risk.
BTW it's great that you're thinking about your pension at age 22, so many think it's too far away to be bothered and by the time they do think about it in their forties they've an uphill struggle to provide a decent income in retirement.

Ian_W

JeffMinter wrote: »

Also, am I allowed to take out a pension if I have passed the retirement age but still working (both for private and state pensions)? The way things work I'm guessing no, but surely that's a breach of the very idea of a pension i.e. refusing to give back the funds that someone has put into for the majority of his life, and expecting back at a predetermined age?

Not quite sure I understand what you mean. If you mean can you be paid your state or a private pension when you reach the appropriate age and still keep working? Simple answer is YES.