We started PensionBee because we felt like the pensions industry needed to change. For too long pension providers have levied high fees and lacked transparency, and our recent research revealed that many current workers are anxious about retirement but unsure what to do about it.
Clearly, we’re not the only ones getting riled up by pension issues. Our article on the six most costly pension mistakes to make in your 30s has been read by thousands of people and has been shared over 160 times (and counting) on Facebook, where it is generating lots of lively discussion.
From distrust of pension schemes to debate over the best type of investment, here are our responses to some of the main points you’ve raised.
Is a pension really a more reliable investment than property?
Steve Collins took issue with our point that it’s a mistake to think property is your pension, saying “I just don’t think it’s factually accurate to imply property is more volatile than assets pensions are invested in.”
There’s risk, but also reasons to be reassured
The money you put into your pension plan is indeed invested, and as with any investment there’s risk involved, and the value of your investments can go up as well as down. But investment managers spread your risk by investing your money in a range of different assets (such as shares, bonds and cash), so it’s unlikely all of these assets will lose value at the same time.
Plus, a pension is a long term investment, so even if there’s a dip, there’s usually enough time for your funds to recover.
The pros and cons of property
This doesn’t mean, of course, that we think you shouldn’t invest in property. Although like any asset, property values fluctuate, Natalie Morris-Carwithen points out that while the housing market is likely to crash in a recession, it usually follows an upwards trend again (above inflation) during the recovery period.
We fully support the idea of investing in several different products, and if you can afford it, investing in both property and a pension is great. But as Matt Taylor says, the buy-to-let market is becoming trickier to enter, with stricter lending criteria and changes to tax relief.
Tax on pensions vs. property
You get generous tax top ups when you pay into a pension (25% as standard) and if you die before 75, your pension can usually be passed on to your partner or family member without being subject to inheritance tax. In contrast, as Alex Pritchard commented, “any property that isn’t your main residence will be a taxable investment on income and gains for the rest of your life”. Alex also makes the point that property is illiquid, something that Lucy Hyland also agrees with: “If you reach retirement and you only have your property, how are you going to release the money from it?”
Steve’s right when he says that there are disadvantages and advantages of both pension investment and property investment, and neither is risk-free, but Lucy sums up the benefits of a pension well:
“The advantages of a pension are employer contributions (sometimes up to 10%) and tax relief. The investments may fluctuate but they should go up.”
Is my money actually safe in a pension scheme?
Ralph Presgrave warned “the government will rob your pension to balance books when the next crash comes”, while Afshin Faridani claims “nearly every pension fund is a Ponzi scheme”. While these comments demonstrate the extent to which pension providers aren’t trusted, they misunderstand how most pensions work.
The lowdown on defined contribution pensions
Defined contribution pensions (the PensionBee plans and most modern workplace pensions are this type) are effectively long-term savings plans with tax relief. Concerns that your contributions are being used to pay out current retirees, with your own retirement income reliant on people paying into the scheme once you’ve retired, are misplaced. And it’s not easy for the government to raid your personal pension fund.
Matt Hammond put it really well, explaining that these defined contribution pensions (also called money purchase schemes) work a bit like ISAs, but with higher tax relief thresholds:
“You invest your money each month, build up a pot and get tax relief from the government. If you are a higher rate tax payer you get an additional 20% back on your tax return meaning that you only pay £60 in for a pension being funded by £100. The funds invested are tax efficient and the can be tax efficient when you draw on them.”
A word about other types of pension
Things may be a little different if your pension is a defined benefit pension, and/or if it’s a public sector workplace pension. Some public sector pensions are unfunded, which means that pension incomes are paid from the employer’s current income. A defined benefit pension is a promise from your employer to pay you a certain income on retirement. While these schemes can bring really nice retirement incomes, if your employer has financial problems, your pension may be affected. We’ve explained this more fully in our article on the BHS pension fiasco.
With wages low and household budgets tight, can anyone afford a pension?
Lots of commenters reckon that the salary we’ve mentioned in our article as an example (£30k) is far too high and perhaps only reflects London wages.
We’ve only used a salary figure because it’s easier to explain these concepts using concrete examples, and we used a number close to 2014’s average salary, taken from ONS figures.
We understand that many people earn a lot less money than this, but the general principle still applies: the earlier you start saving, the easier it is to build a decent pension pot.
Salaries swallowed up
We also understand that for many people, just covering the cost of living is difficult enough, let alone saving into a pension. Leanne Briggs speaks for many when she says that “Most people’s salaries are swallowed up with the cost of living, mortgage, bills etc., especially those with children”.
While finding the money to put aside for a pension is difficult for many, once you’ve taken into account employer contributions (compulsory under auto-enrolment legislation) and tax relief, you’ll find that you don’t have to contribute as much out of your own pocket as you think. Even if you can only afford to pay in a small amount of money initially, starting early and taking advantage of employer contributions is still a sensible idea if you can manage it.
Let’s keep talking!
We reckon that one of the best ways to demystify the pensions industry is to have more of these open conversations about pensions: the good, the bad and the ugly. We’re delighted that our articles are generating discussion, and we’ll continue to answer as many of your points as we can on social media. Hop over to the PensionBee Facebook page to join the debate!
As always with investments, your capital might be at risk.