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Pensions
By Mike Freer of BWCI
A READER has got in touch to say that he has recently become entitled to join his work pension scheme, something which he was discussing with his brother. His brother said not to bother, as it was better to enjoy life today.
The advice from his sibling was that his house would be his pension and therefore there was no need to save for retirement. The reader has asked whether there is a correct and sensible approach?
A large proportion of today’s retirees hold much of their wealth within their home, thanks to the inflation in property prices over the past 40-plus years. This can leave them with a difficult decision should they need to have additional income or capital in their later years.
As well as the emotional attachment to a home, the stresses and costs of moving, including a sometimes-substantial stamp-duty bill, can make the decision to downsize and free up property wealth a difficult one.
Many older clients who wish to remain at home may need to adapt their property to enable them to continue to live there in comfort, and all of this needs to be factored into their financial needs.
One of the major income challenges for some married clients in retirement is that most of the pension income from, for instance, a final salary scheme, is received by one partner.
If that individual needs to go into care and some of that income is put towards this cost, or if they die before their spouse, this can then leave the surviving spouse in financial hardship. They will possibly receive a spouse’s benefit but typically this may only be around 50% of the full pension. However, many bills remain the same or are only marginally reduced.
Therefore, joining your employer’s pension scheme will offer you investment diversification (“not all your eggs in one basket”).
Typically, your employer will be making a contribution on your behalf (this could be around 5% of your salary). If you don’t join the scheme, then you would be missing out on this “free money” from your employer.
There is also tax relief on contributions to a pension scheme for everyone except those with very high incomes. The tax relief is on contributions of up to a 100% of earnings, subject to an overall maximum of £50,000 per annum so joining your employer’s pension scheme won’t affect your take-home pay quite as much as you think.
