Why you don’t need a Pension (but might want one anyway)

When people talk about pensions, they are often referring to savings linked to a plan their employer set up. The luckier amongst us may be talking about a promise of lifelong income from a certain age.

Why don’t you need a pension

The main purpose of a pension for most people is to replace income when they are no longer working. An alternative to a pension could therefore be to never stop working.

If you still plan to cease work but don’t have a pension, you could derive income from another source. Property rental is a source of income for many. If you don’t have a rental property, you may still be able to rent a spare room, or even your driveway if you live in a place where parking is in high demand.

You could spend from savings you have built up, receive dividends from investments or company shares you own, you may also inherit money that you can spend. None of this has to involve a pension.

Although the State pension is not enough to fully meet the spending of many households, it is an important source of income later in life and quite generous if you consider what it would cost to replace an equivalent income privately. This may be a useful foundation for spending that other sources can add to.

Why you might want a pension

A pension is very tax efficient. Money paid into a pension gains tax relief from the government, meaning if you pay £80 into a pension personally, the pension provider will gather £20 tax relief from HMRC, topping the money that lands into your pension up to £100 total. Higher rate tax-payers can reclaim further relief through self-assessment. 

Growth in the pension is generally tax free and when you come to take benefits, current legislation allows you to access 25% of a personal pension as a tax free lump sum. There are limits to the amount you can save tax efficiently into a pension each year and build up in your pension over a lifetime, but these are normally more relevant to very high earners.

Once the money is in a pension, you generally have a number of investment options including cash and investment funds. The more sophisticated pensions may allow investment directly into shares or commercial property.

Finally, if you die and have funds in a personal pension, you can indicate who you wish any proceeds to benefit, so the money is not lost to your loved ones.

In conclusion, a pension is not the only way to create an income later in life, but few other income sources are as tax efficient, widely available or as inexpensive. For most people, pensions are likely to be beneficial, at least as part of their retirement strategy.

An adviser can identify the pros and cons of a pension to you personally, review your current pensions or help you establish a new one and assist with investment decisions for the plan(s).

Find out more information about pensions in our fact sheet.

Read our pension fact sheet

If you would like to discuss your pension further, please get in touch with our team.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 5th October 2020. The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest. You are recommended to seek competent professional advice before taking any action.