Do pension plans still rule?

By THIS IS MONEY
Updated:

 

Is a pension the best place for my money? I need convincing because a £10,000 annuuity will return £800 a year until I die. Who gets to keep the £10,000? Surely if I put that amount of money into a bank I'd get a better deal after a few years and still have access to the capital? I do need help as I am 43 and an undecided whether to buy endowment policies instead.

A.F, Newport, Gwent.

Tim Payne of independent financial advisors Capulet, which specialises in pensions, says: You can't compare pensions directly with bank or building society interest rates because pensions give you automatic tax relief. This means if you invest £10,000 in a pension and you are a higher rate taxpayer you get tax relief on £4,000 of it, so it has actually cost you only £6,000 and a return of £800 a year on that equates to 13.33%. That compares with the best building society rates of about 6.5 to 7%. Even as a basic rate taxpayer with relief at 23% your net return will be 10.38%.

As to who gets to keep the capital, the answer is no one person - annuities are pooled funds so everyone who buys an annuity gets a share.

You can't compare endowment policies directly with pensions either. They are regular savings plans with a minimum term of ten years. There are no tax benefits unless you leave the money in at least ten years and the returns are taxed before you get them.

Deciding how to provide for retirement can be complex. Consider seeing an independent financial advisor.

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