What are the benefits of a pension?
I had been introduced the Phil, by my friend and client, James, and we were meeting for the second time in the Local Hotel close to his workshop. Phil had been in business for around 18 months now and he told me that he had been pretty successful since he had gone out on his own. He told me that James had said to him that he had to have a pension, but he wasn’t convinced.
“They take all you invest away in charges”, he said to me. I presumed he was talking about the Pension Providers, although I suspected he probably meant the Financial Adviser as well.
“Why do you say that?” I asked.
“Well, pensions are not much good,” he continued. “My friend had a pension once and it’s worth nothing now, he tells me.”
I could see it was going to be difficult to change Phil’s entrenched attitude. But I felt it was incumbent upon me to tell him what I believed to be the truth, and that it really was in his best interests to start a pension which he would benefit from when he stopped working or even before that if he wished, so long as he was at least 55 years old.
“I think we have to discuss in more detail what the benefits of a pension are to you, Phil,” I responded. “And I think we have to take with a little bit of salt your pal’s comment about his pension being worth nothing now.”
“Well, I don’t think he was saying that there was no money in it now. He told me he had only paid into it for a few months and then stopped because he joined a company who offered their own scheme.”
“Ah!”, I said. “I think what he means is that the pension he will be getting when he retires would pay out virtually nothing because his fund value, with the best will in the world, will be extremely small.”
“Yes, you’re probably right”, said Phil. “Well tell me what I should be doing….and why.”
“Ok, Phil, let’s start. I know you are single, self-employed and I also know that you should have a pension plan.
“Like every other product of whatever type in this world, there are two bits to a pension. The Features and the Benefits. And the most important parts are the Benefits. In other words, what is in it for you and why you will benefit.
“Ultimately, it will provide you with your income when you come to take the longest holiday of your Life – your retirement. Let’s say you stop working at age 65. Given a fair wind and a bit of luck you could live well into your eighties. Your State pension is going to be relatively small, and unless you win the lottery or marry a rich widow (joke!), you’re going to have to look after yourself without help from anyone else.
“The monies you put into your pension fund will
1) not attract any taxation while invested (under the current rules), and
2) you will be entitled to up to 25% of the fund tax free to do with as you please.
“Furthermore, the personal contributions you make will attract tax relief at the current basic rate of tax, and if you are a higher rate tax payer you will be able to claim a further reduction in your tax by claiming the difference between Basic rate tax and Higher rate tax through your Tax coding or Accounts.
“Let me show you what that means in figures, Phil.
“Let’s assume you want to contribute £100 pm to a personal pension. Basic rate tax relief means you only have to pay £80 pm into the plan although the plan will be credited with £100 pm.
“If you’re a higher rate tax payer, you can claim a further 20% via your accounts.”
“That seems a pretty good deal” said Phil.
“Yes, it does”, I replied. “Do you want me to talk about the features,” I asked.
“No”, said Phil. “ I think, you’ve told me what I want to know. Where do we go from here?”
“Well, I have to take some notes to ensure that I ‘Know My Client’ and that we have to work out have much risk you are prepared to take before you invest any money. Also I have some compliance documents that I need to disclose to you.
“You should also be aware that investment funds can fall as well as rise and that tax rules and rates can change in the future.
“Other than that Phil, let’s get started…”
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