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The intention of the different articles produced by BFP is that they should vary between Technical and Lifestyle. Those about lifestyle consider the wider connotations of Financial Planning. The sort of things that, heaven forbid, you might find yourself discussing with friends round the dinner table or ‘down the pub’.
Give a dog a bad name………….
I find that one of the names that still evokes considerable wrath and venom is ‘pensions’. Indeed, I was having a drink with some friends recently when a young person in the group suggested that they thought it was time they were making regular contributions to a pension plan. I was genuinely quite surprised by the reaction of several of the older people present. “Complete rip-off”, “only sold for the salesman’s commission”, “worst investment you can ever make” – and these were some of the politer comments!
In the past there is no doubt that many (though not all) pensions were badly sold and poor value. It is understandable that people who were hurt by these ‘investments’ still feel resentment and anger. I do, too. However, there have been so many changes to pensions legislation, commissions, flexibility and investment choice that it is quite simply irresponsible to discourage young people from saving this way.
I was fortunate in that when I started work over 50 years ago I was encouraged to make regular savings part of my lifestyle by committing a fixed percentage of my income every week and divide it between short term and long term savings. The short term stuff was ‘blown’ many times over, but I stuck to the longer term ones and as my income went up, so did my savings. I have never regretted it.
Institute of Fiscal Studies (IFS)
In a recent report the IFS said - “Pensions will remain the most tax-efficient form of savings, despite forthcoming tax changes”. They compared saving in a pension with buying a house, putting funds into an Individual Savings Account (Isa), or investing in buy-to-let property.
One major reason that we consider pensions to still form a large part of long term saving is that under the new auto-enrolment programme employers have to match employee contributions. Over the next few years this will mean that total contributions will rise to 8% p.a., of which the employer and the government will pay half.
"Since employers rarely make equivalent offers to match employees' contributions to say, an ISA or a house, it makes savings in a pension much more attractive relative to other assets," the report said.
Fun for all the family!
Employer contributions are certainly to be welcomed, but there are many other reasons why this type of savings vehicle should not be ignored. The importance of this article is to emphasize that pensions are not the ‘rip off’ they might once have been. It is important to encourage people of all ages to utilise the allowances that are still available for long term savings and also to ensure that they realise it is never too young to start. It is entirely permissible for grandparents to make contributions into pensions for grandchildren to which the government will add back the standard rate of tax – whether the child is a tax payer or not.
As always, please contact BFP if you would like further information.
Simon Pym Williamson, Chairman