Okay. I'm normally fairly clued up on all financial sorts of stuff compared to most people my age but I really don't understand pensions.
You pay into it all your life and you won't neccissarily get all of what you put in out? All I see is that more will be put in by some employers who will match contributions etc... what is the advantage over saving?
Cheers to anyone who explains
That is indeed the risk as the annuity you buy with your pension fund will only last until your death (or your wife's death as an option) so if your fund is worth £500,000 and you die in the first year then you have lost out big time.
On the other hand if you live until your 110 and retire at 55 the annuity company will have paid out more than twice and maybe three times what your fund had reached so its a big win for you.
Of course you can take 25% as a lump sum on retirement and do what you wish with it.
The biggest thing excluding employers who match or even double what you put into your pension is that contributions to a pension is tax free eg if your put £80 in the government puts back the £20 tax so £100 actually goes into your pension (more if your a 40% tax payer)
On that basis any other form of savings needs to do very well to catch up with the 20% or 40% gain your pension has already made from day one. The downside is that pension schemes carry an annual "management" charge and there is normally up to 5% difference between the sell and buy price of pension fund units.
In fact some people in the 80's and 90's were sold pensions which carried 11%+ annual charges (my gf was one) which was fine when the fund was making 18%+ per annum but not so good when it was making less than 11% (her money actually went down)
Nowadays pensions have been cleaned up and there are funds which only charge 1% per annum which although they may not be the best performing, they don't have to be. Eg your 1% fund makes 6% giving you a net return of 5%. A high management fee super performing fund which happened to charge 5% per annum would need to make 10% per year to match the lower charging fund.
In my gf case she shut down all her different pensions with high street banks and transferred them all to one reasonably charging (1.68%) but well performing pension company over a number of different funds which gained 28% over the last year compared with the 8% it would have made if she had left the money where it was. Put with her tax rebate and that has given her a 68% first year return on her pension contributions.
Of course 40% relief is removed from April 2009 and all pension investments will only get 20% relief.
Best advice is find a good Independant Financial Advisory especially one recommended by somebody you know. I have dealt with loads over the years and some were awful but the current one is a gem who I would not change from, ever. He spent weeks getting valuations of my gf pensions, putting a 200 page report together for the recommended pension funds with histories compared to her current and his fee was only a few hundred pounds (from the pension company as commision). He also sorted our last two mortgages out for free (to us).
So yes, a pension can pay you less than you paid into it but if your dead, are you bothered? You need to be asking yourself "What happens if I live to 110?"
