Is a pension still worth it?

Three people from the financial services industry say whether they think it is still worth paying into a pension fund. Whom do you agree with?

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Pensioned off? People are wondering if it is still worth paying into a pension scheme. Photograph: Daniel Berehulak/Getty Images

Recent news about pensions has not been good: the stock market has hammered retirement funds, while the next round of quantitative easing looks set to take a toll on both funds and annuities. It is perhaps not surprising that people are wondering if it is still worth paying into a pension – research suggests about a third of those auto-enrolled into workplace schemes under plans to come in next year may even drop out.

We asked three people in the financial services industry if it was still worth paying into a pension. Tell us who you agree with.


Tom McPhail, head of pensions research at Hargreaves Lansdown
"You will probably reach a point in your life when you either can't or don't want to work, and will need some savings to draw on – and a pension is the most efficient and secure way to build up those savings.

"About two-thirds of men and three-quarters of women now reach the age of 75, according to the ONS. Even after the next round of proposed reforms the state pension will only be worth about £7,500 a year, so the chances are you will need some savings to fall back on. The most important thing to do is make sure you have made a retirement plan – preferably something more scientific than buying a lottery ticket every week. There are a variety of savings schemes available, but none are as efficient as a pension.

"Pensions enjoy generous tax breaks. Every £80 you pay in gets rounded up to £100. If you are a higher rate taxpayer you can claim a further £20 on top. And your money grows largely tax free. When you get to retirement you can take a quarter of it back as a tax-free lump sum, and with a pensioner's personal allowance standing at almost £10,000 a year, a substantial portion of the regular income paid to you may be tax free too.

"What's more, if you die before retirement the fund is paid out to your next of kin as a tax-free lump sum (unlike money saved in Isas, for example, which will fall into your estate for inheritance tax purposes).

"Forthcoming reforms mean that your employer will soon be required by law to pay into your pension for you as well. If you pay in £80, between the government and your employer, your savings will get topped up to £160. You've doubled your money on day one. Nothing comes close to matching this kind of return.

"When you do reach retirement there are a range of ways to create your income. You can buy yourself a guaranteed lifetime income (an annuity), but if not you can keep drawing down an income from your pension fund right up to the day you die. When you do die, up to 45% of your pension fund (after tax) can be passed on to your children, or the full fund value can be used to provide your spouse with an income.

"Finally, pensions are set up under rigorous trust laws, so there are independent trustees appointed to make sure your scheme is being run in an appropriate way and that the assets are kept safe for your retirement."


Katherine Oxenham, business development director at Annuity Direct "First, let me make it clear that I am definitely not saying you should stop all your pension contributions and spend the money on something else. After all, I make a living from advising people on how to get the most income from their pension savings.

"The problem is that pension savers lack incentives to save, and they definitely lack interest in the subject. Pensions have always been complicated, and successive governments keep tinkering with the legislation. So-called pension simplification just added another layer of rules to an already overly complex system, and now lots of people don't understand what they are paying into.

"At worst, every pension contribution will also pay an insurance company's charges, commission to a financial adviser, and a fund manager's charge. The government deducts tax on equity dividends. Even the European commission is talking about taking a cut. Yes, you get tax relief on your contributions, and that is an advantage. And there is a good discipline to saving regularly. Yet so many people save habitually for years without any real idea of why.

"One day the insurance company will write to you and say it is time to take an income from your pension. You get the chance to take 25% of the fund as a tax-free lump sum. That sounds nice. Then (in the majority of cases) you buy an annuity with the rest. More complicated choices.

"Annuity rates (that determine how much income you can have) have halved over the past 20 years or so. Therefore, the amount of income your pension can buy is falling steadily year-on-year. Rates will be further affected by more EU legislation next year – the introduction of unisex annuity rates and Solvency II. Not only that, but your retirement income is taxable too. So what is the incentive to pay into a pension in the first place?

"The rules are always changing, so don't throw all your eggs into one pension and expect to have your retirement sorted. Planning for retirement needs to be an active process, something you take a keen interest in on a regular basis. Pensions aren't everything – other forms of investment such as cash, National Savings, bonds and Isas all play an important part too, as can property investment.

"Is it worth paying into a pension? Only if you're going to take it seriously."


Chris Gilchrist, joint author of The Process of Financial Planning "If your employer matches your personal contributions to a pension scheme, or you are in a final salary scheme, then you will earn a far higher return on any money you invest in this way than you can possibly hope to earn elsewhere – so do it. And if you're a fat cat able to bung hundreds of thousands into a bespoke Sipp, carry on.

"But if you're considering contributing your own money into a personal pension or an employer scheme without any employer subsidy, forget it. In the past five years, regular contributions to personal pensions have crashed – people have realised it just isn't worth it.

"Here are the reasons not to contribute:

• If you're a basic rate taxpayer, the maximum benefit you will get from using a pension instead of an Isa is about 6% of the capital you accumulate after 25 years. That simply isn't enough to make up for the restrictions and drawbacks.

• The pension rules have been changed several times in the past decade. If governments struggle to make ends meet, it will be much easier for them to take a bit of the money locked up in pension funds (one or two obscure rule changes will do the job) than to pick your pocket directly.

• Many default funds offered by occupational schemes are rubbish. Target date funds are better, but unless you're willing to manage your money actively, chances are you'll get a poor return.

• If you're now under 40, don't expect to be able to get your money back before age 65 – the minimum age for withdrawal has been raised once and will probably be raised again.

• Despite the abolition of "forced annuitisation", most people will have to buy an annuity with some or all of their pension fund. But annuities are terrible value and will probably stay that way for years.

• If you're married and want to secure a retirement income for you and your partner, annuities offer appalling value for money, but the alternative – drawdown – may be too risky for you.

• Why put your money into a plan where 75% of everything you take out will bear income tax when you can invest in an Isa instead and keep your stash exempt from tax for the rest of your life?"

Do you think it's still worth paying into a pension scheme?


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