Could savers be better off if they delay putting money into a pension scheme? Financedaily Editor Dale Lovell looks at the tax advantages of saving for a pension and the most tax efficient ways to save.

Despite the well held believe that everyone who wants a prosperous retirement should start saving for a pension as soon as they are eligible to, in the run-up to the new tax-year, which begins on April 6th, in what many in the Government and financial circles could view as controversial: many people could actually be financially better off if they don’t commit to a pension plan.

Delay Pension Contributions

People like the feeling of security they get when they commit to a pension plan, but there is a general misconception about what people think retirement planning really involves. Most people think planning for retirement means one thing: paying money into a pension scheme until you retire, then cashing in on your savings. The modern reality is that, just like ISAs, all pensions are is a tax-advantaged investment wrapper.

Clear Your Debt Before Investing in a Pension

Aside from your mortgage, no matter how old you are, saving for a pension should be a lower priority than clearing any unsecured debt you may have. Credit cards and loans incur higher rates of interest, so the money you save in a pension would be better spent clearing what you owe before saving for retirement.

Delay Pension Contributions to Diversify Investments

For tax efficiency and flexibility, financial advisers argue that it is often best to hold a mixture of pensions, ISAs, cash and other investments at retirement.

Even those with no debt could benefit from delaying pension contributions until a later date. It is a theory supported by many Independent Financial Advisers (IFAs), including Jason Witcombe, an IFA from Evolve Financial Planning and our resident financial expert.

He explains; “Under the current rules, pension contributions attract tax-relief at your marginal rate but are then taxed when you draw benefits. For higher rate taxpayers, a £100 gross pension contribution will only actually cost £60 with the benefit of 40% tax relief. For higher rate taxpayers this actually means a 66% enhancement on your investment.

“For those who do not pay higher rate tax, there is an advantage in making any additional savings into an ISA. Like a pension, the money can be invested into equities which, over the longer term should outperform cash and fixed interest assets, but at retirement, the fund could be converted to fixed interest and any income would be tax-free.”

Save for Retirement via an ISA

Make the most of your tax free savings each year by investing in an ISA. You can choose from a cash or shares ISA and with most cash ISAs you can access your money with no notice period required, just like your bank account. The only difference is you don’t pay any tax on the interest you earn in this account and all earnings can be added to your ISA, growing year on year until retirement.

Almost two thirds of people do not have an ISA, half of them because they don’t believe they have enough money to save in an ISA.

The lesson many earners, especially younger career professionals is that if you are a basic rate taxpayer now, but feel that you are likely to become a higher rate taxpayer in the relatively near future, why not consider delaying pension contributions until you can obtain higher rate tax relief.

ISAs offer tax-efficient ways to save and, as we’ve demonstrated, can be an equally effective way to plan for retirement without savers having to put all their eggs into one pension plan.

ISAs: A Guide to ISAs: Follow our guides to find the best ISA for you. Informative ISA tax-free savings guides, plus money saving tips and advice on what to look for when choosing an ISA.

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