Should you abandon your pension?

I’ve always thought that putting money away for retirement is important. I think 15% into retirement is a sensible. However, I’ve always been less sure about the best investment vehicle to use.

Why are pensions schemes popular?

The obvious choice is a private pension. The benefits are that you don’t pay any tax on the money the you put in; your pension contribution is deducted from your salary before tax.

The other advantage is that your employer typically contributes an additional percentage. For example, if you contribute 8% your employer may agree to pay in 5%.

What wrong with a pension scheme?

The problem I have with the UK pension scheme is the lack of control. I’m not allowed to touch my money until retirement, which is by design (so that people can’t cash out early and be poor in retirement). As a result my money is at the mercy of incumbent government laws.

For example, the UK government recently reduced the lifetime allowance from £1.8m to £1m. In my opinion, £1m in a pension pot is not a big number (especially if it is your only form of income in retirement). estimate that £1.25 will generate a retirement income of just £41,000.

At the time of writing I am 25 years old. How much will the pension laws have changed when I come to retire?

An alternative

The alternative that I am proposing is a Stocks & Shares ISA. I’m going to put a percentage of my income into the ISA which will be split across a number of low cost investment funds.

The disadvantages of this approach is that I don’t get the tax relief, when putting money in. Tax is deducted before making any contributions to my ISA.

The other disadvantage is that I have to be more disciplined because there is nothing to prevent me from cashing to money out.

Starting Today

From next month I’m going to be contributing £200 into my ISA, split across four funds (HSBC FTSE 250, American, Emerging, European). I will also be putting extra money in when I can afford it.

I’m excited to watch the fund progress and I hope to have a multimillion pound portfolio when I come to retire!