MONEY COMMENT
Five Reasons To Get A Pension

By Cliff D'Arcy
November 9, 2004

Of all the various aspects of personal finance, pensions seem to have the worst press.

People are happy to discuss house prices, interest rates and other matters that are beyond their control, but incredibly reluctant to talk about planning for their retirement. And if I had a pound for every time that I've heard the comment, "My house is my pension", I'd be able to afford a mansion!

To be honest, there's no valid excuse to justify not saving for retirement in one way or another, except genuine poverty. Here are five reasons to get a pension today:

1. The government chips in

Pension contributions attract tax relief, which means that the government adds to your pot. Basic-rate taxpayers can turn 78p into £1 by putting it into a pension, which means growth of 28% on day one. For higher-rate taxpayers, 60p becomes £1, which is a 67% boost. Even non-taxpayers can get basic-rate tax relief, simply by paying into a Stakeholder pension.

2. Your employer may share the expense

Every company that employs five or more people has to offer its staff at least a Stakeholder pension. Although firms aren't obliged to contribute, most good employers will add to your pot.

For example, although The Motley Fool is a small company, it runs a low-cost company Stakeholder scheme and puts in up to 4.5% of our salaries, depending on how much we personally contribute. So, thanks to tax relief and the Fool donation, every £10 I pay in turns into £23 on day one. Nice!

3. You can't dip into your pot

Pensions are earmarked for one use, and one use only. They exist purely to provide us with an income when we retire. Hence, the authorities have made it very hard to dip into pension pots. You can't touch your pension pot until you're at least fifty, which gives it time to grow. (This rule doesn't apply to people in professions with limited working lives, such as professional sportspeople and broadcasters.)

This discipline is essential - otherwise, some people would end up using their pension pot as an 'emergency fund' (witness the pension unlocking scandal). However, if you don't like this lack of flexibility, you can always save for your retirement via an ISA.

4. You can invest in a range of assets

Pension funds need to be managed conservatively, with an eye on long-term stability and growth. Hence, they invest in a range of assets, including cash, bonds, property and, of course, shares. This 'diversification' (spreading money about) helps pension funds to manage risk and produce steadier – if sometimes lower – returns than shares alone.

What's more, many pension funds use a 'lifestyling' approach, gradually transferring your money into safer investments as you near retirement. This reduces the danger of your pension being demolished by, say, a stock-market crash.

5. You're playing a long game

Given that you may start a pension in your twenties, but not draw on it until you're in your sixties, you are taking a very long-term view. And the thing about investing is that it saves its greatest rewards for the most patient investors. Growth of, say, 10% a year over forty years will turn £1 into over £45, which is a handsome return, even after taking account of inflation (rising prices).

I'm 36, which means that I have at least twenty – and probably thirty – more years of work ahead of me. That's long enough for the stock market to produce superior returns, which is why all my pension contributions go into a no-frills, low-cost, index-tracking fund, which simply passively tracks the stock market up and down. I'm convinced that my faith in the stock market and corporate Britain will reward me with a comfortable retirement.

So, no more excuses: start saving for your 'grey years' today!

PS: Watch this space for a balancing article, "The Five Worst Things About Pensions"!

More: Visit our Pensions centre | Your Retirement Is Your Problem.