Why do I need a pension?

With the issues of how you will fund the cost of old age ever growing, Tom McPhail of Hargreaves Lansdown explains why everyone should save for retirement and why a pension is the best way to do it...

Hello, I’m Tom McPhail, I’m head of pensions research for the wealth management company Hargreaves Lansdown.

I’m going to try in just a minute to talk about why it’s a good idea to put some money aside for retirement and why a pension is probably for most people the best way to do that.

Why do you need to save for retirement? Simply because by the time you get into your 60s or 70s the chances are at some point you’re going to want to stop working. You’re not going to want to carry on working through your 70s into your 80s. Average life expectancy now for men and women is around 85 – slightly more for women, slightly less for men.

There’s going to come a point where you’re going to want to live off your savings – you need to have something to live off. The current state pension, £97.65 a week, is not enough to give you a decent standard of living in retirement, and even with the welfare you get from the Government, you’re still looking at state support of only £6,500 a year, and again, I think most people find that’s not enough to give them a decent standard of living in retirement.

So, you’re going to need some money. You’re not going to get it from the state – you need to provide for yourself to at least some degree. So then its just a question of where are you going to get that money from?

Well, for most people that means saving some money up. You might be able to take some money out of your house, but there are all kind of complications with that. It’s a high risk strategy – its one asset, it may or may not be able to produce some income for you, you may or may not want to move house when you get to retirement.

So in the meantime you’re going to have to put some money aside, to build up a pot of money to provide you with an income in retirement.

Why a pension? Because it’s safe – the money is put into a trust fund. You actually can’t get at it before the age of 55, so whatever else happens that money will be there to provide you with an income in retirement.

And because you get tax-breaks, the government tops the money up when you put it into a pension. You put in £80, the government tops it up to £100, and currently if you’re a higher rate taxpayer you get another £20 back from the government as well. You get tax-free growth, most of the income, most of the capital gains is tax-free, and when you get to retirement you get tax-breaks again.

A quarter of the money comes out tax-free, and the first £9,500 a year of your income is also tax-free. Tax breaks on the way in, tax free growth, tax breaks on the way out.

You’re going to need something to live off in retirement. It actually doesn’t matter where you get that money from, but the point is that you need to save it up somewhere, and I think for most people a pension is going to be the simplest and most effective and most efficient way of doing it.

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