It’s all too complicated!

on Aug 06 in Reality Check , Too complicated tagged by Brian Wood

We have to sympathise on this one – not because pensions are inherently complicated, but because all the rules, language, regulations and technicalities surrounding pensions have turned a simple idea into something that can look very messy and hard to understand.

The basic idea of a pension is simple.  You (or someone on your behalf) puts money away during your working life, so that when you retire you will have a pension to live on instead of your salary.  That’s how it all works –whether it is a state pension, company pension, personal pension or whatever.

Much of the complexity is caused because pensions attract tax relief.  The government is paranoid about this: on the one hand it wants to incentivise people to take out pensions; but on the other can’t stand it when people start taking advantage of the tax incentives.  The result is almost continual chopping and changing of the rules that doesn’t really help anyone.

There is another type of complexity which is to do with the language of pensions and how they work.  If you want to get the most out of your pensions, it’s worth making an effort to learn the basics – ‘just enough’ to make good decisions.  That’s where we have pitched the book – to give you ‘just enough’ information so that you can take the right actions to reduce your pensions gap.  If you need more detail, you will be to find links to it on this website once it is completed.

If it still too much too cope with (and this is bound to happen sometimes), we strongly suggest that you get professional advice.

2 Comments

  • says:

    I couldn’t agree more. No matter whom I’m talking to, whether a city broker or factory worker there is always something in common – misunderstanding and lack of trust of pension schemes.

    When working out whether a pension is right for you, the best place to start is to drop the word pension and blank it from your mind. Now remember that a modern day pension is just a long term savings plan; a way of building an asset for the future. The bigger your asset, the more money you’ve got to generate an income in retirement – that’s it really.

    With any asset building tool, whether it be a bank account or money under the mattress (because you don’t trust the banks anymore) the idea is to build as much money as quickly as possible at least cost to you.

    As the above article mentions, you get something called tax relief when making contributions (basically this is where the Government helps you make your contribution by giving you some tax back). Now consider a typical modern day pension that’s offered by an employer, in addition to the help you get from the Government an employer will usually make a contribution. So what you have is a long term savings plan where there are three people contributing; you, the Government and your employer. Not many saving schemes offer this!

    The following example illustrates the benefits of a company pension. It assumes your employer pays in the same as you:

    Reduction in your take home pay: £80
    The Government’s contribution (tax relief): £20
    Employer contribution: £100
    Total monthly contribution: £200

    By adding these three contributions together, you get £200 invested each month but it only costs you £80. Turning £80 into £200 is equal to a 150% investment return. Therefore, those that turn their noses up at their company pension need to find 150% growth every time they invest to match the asset building capabilities of the company’s scheme (which isn’t going to be easy).

    So to reiterate, all we have here is a long term savings plan that provides a superb return, the only shame is that it’s called a pension, but remember that’s just the name so don’t let it put you off.

  • says:

    I like your example – mine was never explained so simply….
    all jargon, no options. One reservation, the Govt. often changes the rules, especially on tax relief.

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