This topic is one which crosses every financially-wise mind at least once in their lives, with the answer varying wildly depending on a number of circumstances. Pensions have long since been regarded as one of the best investments that anyone can make, but for a wily investor an ISA could fast replace this. Pensions have a number of advantages over investments such as stocks, shares, and ISAs, but the payout in the end is likely lower than you’d get if you invested well.
First and foremost for every person to consider is stability; a pension is a guarantee of a stipend per year, while an investment may not pay out as hoped. Pensions are a better investment for those with lower incomes, or those with little investment knowledge. If you would like to try investing instead of a pension, an independent financial adviser is strongly recommended. For those with a large income, hiring a third party investment adviser is best practice, as it’s difficult to analyse the future of stocks or shares without training. Though the payout of a pension may be lower than if you had invested, for many people it’s simply not worth the risk, and most can actually put more into a pension than saving for an ISA.
This brings us onto our second point; pensions are tax deductible/tax free. This means that, depending on where you’re saving, you could have 20-25% more in your pension than you would be able to save. Many businesses across the UK offer competitive pension packages as an enticing feature aswell; they can put into your pension tax free, so often offer 20-50% extra to what you put into it. Again, pensions prove to be better for low-medium income households.
As we touched upon earlier, another key aspect to consider is the risk involved. Investments always have some risk, even with low-mobility investments. A financial adviser can always minimize this risk, but there are always unforeseen circumstances. Companies can be dissolved, or go bankrupt, and the chance that this could happen makes it difficult to place your life-savings into.
There are however many advantages to investing which makes them extremely lucrative to those who can afford to take the gamble. An investment can be redeemed at any time, meaning that if something did happen for which you needed that money (car accident, repairs etc.) then you can use the money you’ve saved. You cannot do this with pensions, with the current minimum age for withdrawing your pension at 55. It’s estimated that this will be increase to 57 by the year 2028. The other side of this is that since you can always access your savings as a resource, that you will be taxed as such, and means testing for government benefits (Working Family Tax Credits for instance) will likely deny you the benefit.
The ideal situation would be a balance of both government or private pension, and investing. The access to part of your money could prove invaluable, and the potential earnings your investment could make may make it worthwhile. The security of a pension is by far the most accessible and friendly option, while an investment should be used to supplement this. Still, no guarantees.