By Derek Baty, of Armstrong Watson

Last updated 22:27, Wednesday, 04 June 2008

If you want to make the most of your retirement is a pension plan your only option? Some people challenge the received wisdom by suggesting money would be better placed in property or in a building society.
Derek Baty, of Armstrong Watson, weighs up the options.

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Time to relax: But if you want to enjoy a comfortable retirement, plan early and wisely

Over the past few years personal pension plans have acquired a poor reputation. I’ve had many clients tell me they don’t believe in pensions and their money would be better placed in the building society or invested in property. Their view is normally based on conversations they’ve had with friends and acquaintances, recently retired, who feel that the income generated by their pensions is less than expected, or in some cases promised.

This could be because the projected maturity values for plans taken out, say, 20 years ago were based upon levels of investment growth and interest rates which have proved to be unrealistic.

There is nothing wrong with pensions; in fact the tax relief given by the government makes them a valuable way of providing for your retirement.

Putting £100 in a building society means just that – it’s worth £100, but if a higher-rate taxpayer puts £100 in a pension it immediately grows to £166 thanks to the tax relief.

Another comment quite often heard is “my house is my pension”. There is no doubt that anyone who invested in property over recent years has seen its value increase substantially. However, when you retire you will still need somewhere to live.

Standard Life calculates that, on average, downsizing across the UK will only provide 16 per cent of desired pension income. “Our analysis shows that banking on your main residence to provide a sufficient retirement income is a potential retirement disaster unless you have made sufficient provision elsewhere,” says Andrew Tully, senior pensions technical manager at Standard Life.

The best way to look at a personal pension is as a savings scheme with tax advantages. The pension is a tax efficient ‘wrapper’ and, like any savings, the end result depends on how much went in.

These days a wide range of investments can be wrapped up inside a modern pension contract, ranging from cash funds to shares in individual companies.

Traditionally, if you contributed to a pension plan with one of the large insurance companies you were tied to whatever investment funds they had in their own range, which in some cases could be very limited.

Today, most pension providers will allow access to a much greater choice, not just their own funds, and will provide links to other fund management groups.

If these contracts don’t offer enough flexibility then a Self Invested Personal Pension (SIPP) should. A SIPP allows an individual to take control of the investment process and, for example, buy and sell shares online.

Like any investment, a pension should reflect the level of investment risk you feel comfortable with. It should be reviewed on a regular basis to ensure it is meeting your objectives.

If it isn’t then action should be taken, either to switch into more suitable funds if the contract allows, or transfer to a more flexible contract (after checking for transfer penalties).

Overall, pensions don’t deserve their poor reputation but they do need careful nurturing and regular maintenance to make sure the end result doesn’t come as a nasty surprise.

• If you would like more information about pensions contact moneymatters@armstrongwatson.co.uk or call freephone 0800 195 2161.