United Kingdom

Pensions best retirement-saving method, says IFS

March 2016


Pensions remain the most effective way to save for retirement, the Institute of Fiscal Studies (IFS) has said.

The IFS views came just prior to the budget, where a series of tax reforms were widely expected to be announced, including a flat rate of tax relief of less than 30 per cent, which led to fears that higher earners making employee contributions would be discouraged to do so due to higher tax rates during retirement. But shortly before the budget, the government announced that the tax reform proposals had been scrapped.

According to the IFS, higher earners are still set to benefit from pension saving, especially as the 25 per cent tax-free lump sum is larger for those facing higher income tax rates during their retirement.

Martin Parish, South West Area Director at Aon Employee Benefits agreed. "Pensions definitely remain the most effective product to save into for retirement," he said. "Tax relief, at whatever level, is a great incentive to save. The impact of compounding tax relief over many years cannot be replaced in a product where there are no tax incentives. As ever, the challenge for the saver is to strike the right balance on issues such as affordability and accessibility."

Auto enrolment (into workplace pension schemes) too, has created an added incentive for pension saving, with employers contributing £3 in pension contributions for every £5 the employee - and government - pays in. In essence, an individual enjoys a 60 per cent bigger pension than they otherwise would.

According to the IFS, employers rarely match employees' contributions to an ISA or equivalent, meaning that pensions, thanks to auto enrolment, are much more attractive propositions for many.

Parish added: "Any method of receiving an incentive for joining a savings plan, which is all a pension is, must have long term benefits for the saver. Whether this is achieved through a combination of joining your company pension scheme and tax relief the uplift an average saver enjoys is unrivalled.

Certainly, employer contributions to an ISA are rare or if they are offered by an employer, they are not made at the equivalent level as the pension contribution to take into consideration the less favourable tax treatment for the employer. Automatic enrolment has definitely helped get people into good workplace pension schemes where they might not have ordinarily joined, but let us hope we do not experience a rise in opt out rates as we move towards the higher minimum standards set under automatic enrolment legislation."



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