How you will pay for your retirement is an important decision. Should you build up your savings or is it worth paying into a pension? Whether you choose to join a pension scheme offered by your employer, set up your own private pension or make your own provision via bank or building society savings, there are important things to consider when saving for retirement.
Bank or building society accounts
Although bank and building society products are not specifically designed for saving for retirement, they are popular with many savers for the flexibility and range of options they offer.
You may consider saving regularly at your bank or building society, using saving products such as ISAs or the New ISA (NISA) accounts. Under changes that came into effect in summer 2014, you can now pay up to £15,000 a year into ISAs, which can be held in cash, stocks and shares or any combination of the two.
Interest and investment gains made on ISAs are tax exempt, although because you will be making payments out of your take-home pay, you will already have paid income tax on the money you pay into an ISA or other savings product. This does mean that you can take your entire ISA savings tax-free when you decide to withdraw them.
However, despite the wide range of ISAs and other accounts available, many bank accounts and other savings products currently offer historically low interest rates that may struggle to keep pace with inflation.
ISA rates are not as high as they used to be and you usually need to tie up your money for a period of several years – normally up to five years – to get the best available rates. For savers who need to get their hands on their funds quickly in case of an unexpected emergency, this lack of instant access can be a problem. When you start saving for retirement it’s important to keep this in mind.
Is it worth paying into a pension?
As pensions are specifically designed for saving for old age, they are less flexible as savings vehicles than bank accounts, although offer many advantages for those saving for retirement.
Unlike high-street savings products, if you have a company pension, you have the right to expect your employer to pay into it too. Often, the more you pay in the more they pay into it to, which can be worth as much or more than the value of your own contributions.
With a pension, you will have already paid income tax on the pension contribution you are making, but your pension provider will claim this back from the government. This means that for Basic rate taxpayers, for every £80 you pay into your pension, you end up with £100 in your pension pot.
However, as pensions are typically invested on the stock markets and a range of other financial assets, the value of your pot can go down as well as up. If you have a money purchase pension, also known as a defined contribution pension, you are more exposed to market movements that could lose money.
Pension savings are also tied up until at least age 55, although reforms coming in from April 2015 will allow savers more freedom over how they use their money in retirement.
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.
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