What are the benefits of investing in a pension plan?
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What are the benefits of investing in a pension plan?

Pension plans are a tax efficient way to save for retirement. When you get to retirement age you will only be due the basic pension, if you have no other provision. Retirement should be a time for enjoying the fruits of you labour over the previous 30 to 40 years. A time to travel, eat out and socialise with lifelong friends. Sadly, in 2010 the basic pension stands at £97.65 for a single pensioner, and £156.16 for a pensioner couple. Hardly sufficient to provide for even a moderately flamboyant lifestyle.

A pension plan, which you contribute to during your working life, can bridge the gap between the income that you require for a good standard of living, and what is provided by the state. It enables you to take responsibility for your future, and provide for yourself when your economic productivity decreases or ceases, through choice or ill health. The government recognises that there is a shortfall in what they can provide, and what people will require in retirement, and therefore have simplified pensions, and made them the most tax efficient way to save for your retirement.

When you contribute to a pension you are doing so knowing that the money you invest cannot be taken out until the stipulated minimum retirement age in your plan. This age varies and if you want to retire early you should make sure that the pension you chose allows you to do so. The fact that your money is tied in can be a benefit for some and an annoyance for others. The alternatives to a pension, such as an ISA, allow for your money to be withdrawn. Having access to this money means that it takes extra discipline to not access the money when times are tough. This can lead to a shrinking pension pot during lean financial times, and mean that your retirement provision falls short. A pension can force adherence to retirement saving. Of course you can stop your contributions when money is short, but you cannot withdraw from your pension pot until it is time to do so.

Perhaps the biggest benefit of a Pension over an ISA is if you are a higher rate tax payer and get high rate tax relief on the way in, and then if you are a basic rate tax payer at retirement and you only pay basic rate on the way out. You do of course also get a 25% tax free lump some with most pensions.