There are various benefits to having a pension, not least to provide a regular and dependable income in later life. Many people reject pensions as a way of saving, and for the most part for the wrong reasons. “Mis-selling scandal,” “they are expensive,” and “my business is my pension” are typical throwaway comments made to dismiss pension funding. This is nothing short of self-harm; the world has changed, and pensions are now better than ever.
The state pension simply is not sufficient—£168 would barely support most lifestyles. According to the United Nations, there could be 2.3 billion over 65s by 2050 due to increased average life expectancy in the developed world. It is best to take some personal responsibility and save for your future. Right now, you might think that you will work forever, but your job or your health may hinder you from doing so. Here are three little known reasons why pensions are likely better than you think.
Super-charge your, or your loved one’s growth potential with the taxman’s help
You are likely already aware that your pension is supported by the taxman since you can claim tax relief on your contributions. This means that as a minimum, if you invest £1,000 the government will top up that figure to £1,250. That is £250 of free money—and even more, if you pay higher income tax rates.
What is often overlooked is that any person can pay into anyone else’s pensions, and you do not need to be over the age of 16 to have one. A pension can start being accrued from birth, so a grandparent could pay into their grandchildren’s pension from day one. You can also pay into your adult children’s pension, while siblings can pay into each other’s pensions.
Grandparents and parents funding their children’s pensions is a great way of efficiently gifting tax. This also comes with the added benefit that the money is ringfenced for their later life, meaning that your children will be unable to spend it on things you might not approve of in their earlier years.
Supercharge your returns
Once you place money into a pension, the world is literally your oyster. There is a staggering range of investment options available. You could continue investing in cash accounts if you want to, but potentially better returns can be gained if you invest in the world’s best companies and economies. Very few people become millionaires by putting their money in the bank. They instead become wealthy by buying something that they can later sell or use to provide an income. Most people make their money through business or property ownership. Pensions allow you to access these wealth creating assets with ease.
Looking at the graph below, it can be seen that investing in a global pension portfolio will give you the opportunity to make an above-inflation return, thereby beating a savings account.
Help the planet
Many investors now take an active interest in how their money is used. Most people now agree that climate change exists and it is necessary to reduce our carbon footprint. Furthermore, it is also widely agreed that corporate governance must change in the aftermath of the 2008 financial crisis.
The Global Sustainable Investment Alliance suggests that worldwide in 2016, over $22 trillion of assets were managed through responsible investment strategies. Additionally, environmental, social, and governance investing are now available as investment options. Adding money into your pension can therefore literally allow you to make a positive impact on the planet. You can screen out businesses or sectors you dislike, and instead invest in transforming markets—with green energy being a prime example. When you put your money in the bank, it becomes the bank’s asset which allows them to lend it to whoever they choose, perhaps including companies or institutions that you would never personally decide to invest in.
If you wish to fund for your own retirement, would like to help a loved one fund their retirement, or if you would like to look ways of making a positive difference through your investment decisions, speak to one of the financial planners at Capital.