My friend Rufus (not a real name to protect anonymity) who’s a broadcaster, was talking about his pension scheme the other day. It promises that for every pound contributed it will match it up to a maximum 5% of his salary.
Yet for three years Rufus hasn’t been putting money in. I was shocked; this is free money, he’s got a good job and can easily afford to contribute and quite simply not taking it up is throwing cash away.
The size of the waste…
- Rufus’ Earnings: £45,000
- Tax Situation: As a higher rate taxpayer, since pension contributions are paid before tax, for every £1 he pays in, he only loses 60p from his pay packet (80p if he’d been a basic rate taxpayer).
- Company Situation: For contributions up to £2,250 a year, it is matched.
- Overall: Therefore for every £100 he contributes he gets £333 into his pension (if he’d been a basic rate taxpayer it would’ve been £250). Put another way, to invest £4,500 a year he would only need to contribute £1,500, or £125 a month. A staggering rate.
Why he hadn’t contributed…
The answer, when it came, was as expected – his reason for not contributing was because “pensions don’t do well do they, I’m worried about what happened to equitable life and losing my cash.” We have a real problem with the perception of pensions in the UK, most people consider pensions to be risky. They’re not, pensions are completely safe.
At the risk of repeating my old one word caused the pension crisis blog (which goes into much more detail) we have a national misunderstanding disease when it comes to pensions. Let me make it plain for most standard pensions (not counting final salary ones, which are slightly different)…
A pension’s NOT a product. It a tax-wrapper, in the same way as an ISA is. It lets you save for retirement from pre-tax income. It’s not risky in any way.
So where does the risk come from?
The risk comes from what you decide to put in your pension. In the same way as you can have a simple savings type cash ISA or a shares investment one. You can choose what to put in your pension, including a rough equivalent to savings.
So people’s pensions haven’t performed badly, but the investment many people put in them has. The lesson from all this is, if you can afford it, do take up your pension, but be careful what you choose to invest in.