Investment planning in the new pension environment

The changes in pensions announced in the recent UK budget were quite staggering in their scope and I suspect that it will be several years before the full implications of them dawn on most people.

Ignoring the minor, but quite significant, changes the biggie was that as from April 2015 your pensions savings effectively becomes a proper savings plan ie one where you can take the money out. Up to now, pensions often seemed to be an insurance company scam whereby you paid them money over your working life and when you retired they kept that money and paid you out an allowance from it. As of April 2015, so long as you are over pension age (usually 55), you can withdraw those savings.

That to me changes significantly how I consider my pension. Money put into it is no longer lost to some insurance company but is available to me just as my other savings are. One of the effects of that is that I’m much more willing to save money in the pension which can only be a good thing.

Another effect is that it somewhat muddies the waters as regards the difference in a pension and an ISA. In effect both are now fairly equivalent places to invest your money. With the pension, you get tax relief on the way in (ie put in £100 and it becomes £120 in the pension but income paid out is taxable) whereas with the ISA there’s no upfront tax relief but you don’t pay tax on any income paid out. This means that, for most people, a pension is a better savings vehicle as they are likely to be paying higher tax when working than when retired. Also, the limits are different with the pension being, largely, limited to your total income whereas the ISA is limited to £15,000 ie there’s, for most people, no practical limit on pension savings.

Combined with the new freedom, it would seem that it’s best to put your investments in a pension and your cash in an ISA.

A final point to note is that with pensions effectively becoming jumbo ISAs, there are likely to be a lot more investment companies offering them which, hopefully, will reduce the charges in due course.

What I suspect will throw many people is that all of a sudden their pension has become a, hopefully, large savings account. What you need to remember is the reason behind pensions which was always to create a large savings account which paid you an income for the rest of your days ie lifting the lot and spending it as soon as you retire could cause you considerable financial difficulty later on.

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