When it comes to saving for retirement, nothing beats a good pension.
This article forms part of our Duelling Fools feature on 'Pensions vs ISAs'. You can also read the case for ISAs and vote in our poll.
If you're investing, there is no shortage of different products for you to use as a vehicle for your money. For example, you can stash your cash inside tax shelters such as Individual Savings Accounts (ISAs), Real Estate Investment Trusts (REITs), Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EISs) and so on.
However, when saving for retirement, one investment vehicle stands head and shoulders above the rest: the humble pension. Here are six reasons why pensions beat other investment vehicles hands down when you're investing for life after work:
1. Tax benefits
It's often said that 'the tax tail shouldn't wag the investment dog'. Nevertheless, the various tax breaks offered by pensions amount to a particularly compelling combination.
First, you get tax relief on your contributions. In effect, this gives you back the tax you've already paid on earned income. Thus, basic-rate taxpayers get 20% tax relief, which turns an £80 contribution into £100 on day one. Higher-rate taxpayers get 40% tax relief, so a £100 contribution effectively costs just £60.
Second, you enjoy tax-free capital appreciation on any investments within the pension. Also, most of the income earned by these investments (with a few notable exceptions, including share dividends) is also completely tax free. Third, when you come to draw your pension, you can take out a quarter (25%) of your pot as tax-free cash, plus any pension income within your yearly tax-free allowance won't be taxed.
2. Generous contribution limits
The contribution limits for pensions are among the highest around. With an ISA, you can't contribute more than £7,200 per tax year (rising to £10,200 soon). However, you can contribute up to 100% of your annual earned income into a pension, subject to an upper limit (£245,000 in 2009/10). Even non-earners can contribute up to £3,600 a year into pension and get 20% tax relief -- which is why both my young children have pensions.
3. Employer support
Although your employer won't be willing to contribute to your ISA, millions of employers provide -- and contribute to -- work-based pensions. In fact, you won't find the guarantees offered by generous final-salary pensions anywhere else. Alternatively, some employers will match your pension contributions pound for pound, doubling your money on day one. Also, from 2012 onwards, all employees will enjoy a minimum 3% employer contribution (unless they opt out).
4. The widest spread of investment options
Diversification and asset allocation are two key concerns for investors. The good news is that pensions offer a vast range of diversified investment opportunities. For example, you can invest in shares, bonds, cash, property, commodities and gold, plus less mainstream investments such as traded endowments, AIM companies and so on. What's more, investing via fund supermarkets and Self-Invested Personal Pensions (SIPPs) can earn you discounts and make you better off.
5. Flexibility and reasonable access
From 6 April 2010, the minimum pension age will rise to 55 years. In other words, any contributions to a pension must be invested until you're in your mid-fifties at the earliest. To me, this lock-in is a good thing, because it earmarks this money solely for retirement, thus avoiding the temptation to dip into it before time.
What's more, for money already invested into a pension, it's usually simple to move between investments, with many pensions offering online access and switching. In addition, pensions have low minimum contributions: £20 a month for stakeholder pensions and £50 to £100 a month for most SIPPS and personal pensions.
6. Certainty of income
When you finally come to retire, your pension pot must be used to buy an annuity by your 75th birthday. An annuity is a guaranteed income for life -- however long that may be. This income is usually paid monthly or yearly by a pension provider or insurance company. Therefore, pensions offer absolute certainty of income in retirement.
In summary, like Ronseal, pensions 'do exactly what it says on the tin', making them an excellent choice for retirement saving!
> Do you prefer pensions or ISAs? Vote now in our Duelling Fools poll.
