Do I need a private pension

It's an interesting question. Pensions have come in for a lot of flak in recent years: company schemes going bust or not having sufficient assets; mis-selling of private pensions; Gordon Brown’s tax on dividends; lousy returns from with profit funds; insurance companies closing funds to new business and selling them off to ‘asset strippers’; rafts of legislation that most people don’t understand; excessive charges; poor investment returns – to name but a few!

Not surprisingly, pensions is a dirty word to many people and indeed evidence suggests that many of us don’t bother, or make alternative arrangements to plan for their retirement – relying on the value of their home or business, investing in buy-to-lets, for example.So, do you really need a private pension?

Let’s look at the basics. Retirement planning is all about making sure you have enough to live on when you decide to stop working; either because you are too worn out to go to the coal face every day or because work is getting in the way of other things you want to do with your life. If you don’t plan ahead, you will largely be relying on any assets you have built up during your lifetime – these might include property, the sale of a business, savings, inheritances and, if you are lucky, a decent company pension scheme (although these are an endangered species). In the absence of these, you will probably have to rely on state benefits. These are fine as far as they go but, for most of us, they don’t go far enough. In addition, successive Governments have cut state benefits in real terms (adjusted for inflation) because they are proving to be unaffordable.

Where do private pensions come in? Well, they are certainly a tax efficient way of building up funds which can be used to provide income in retirement.The main benefits are:

· Contributions qualify for tax relief at the highest rate you pay;
· Investment returns are tax-free, except for tax deducted from dividends on shares, which are not reclaimable
· When you draw benefits, you can take up to 25% of the accumulated fund as a tax-free cash sum;
· After taking the cash, the residual fund can be used to provide an income, either by purchasing an annuity, which basically means you select a fixed or increasing income for your lifetime, or
· Alternatively, you can leave the fund invested and draw an income to suit your circumstances. For many people this is preferable because you have much more flexibility and control. It’s worth noting that any income drawn is taxed as earned income, but this doesn’t detract from the fact that you will have had decent tax breaks along the way;

Of course, choosing a suitable vehicle for your hard earned savings is crucial.You basically have three choices:

· A ‘packaged’ product offered by an insurance company; these are often simple products with low charges but limited investment choices;
· A ‘wrap’ arrangement, which may be more expensive to administer, but gives you a great deal of control over where to invest your pension fund. This means that you can build a well balanced portfolio based on your financial objectives and appetite for risk;
· A Self Invested Personal Pension Plan (SIPP); a bit like a wrap really, but useful for investing in assets such as commercial property, land, specialist shares etc. Watch the charges and the quality of administration though.

Despite all the misgivings, I reckon a private pension is worthwhile as part of an overall retirement program because you get some valuable tax breaks plus a high degree of flexibility in terms of investment choices and the amount you can invest.