Have you recently stopped your pension contributions as a result of business or job insecurity?
Perhaps you’re employed and have reduced the amount you personally pay into your pension? Or perhaps you’re self-employed or a company owner and have stopped pension contributions altogether?
In these strange times the economy and markets are volatile but the time to re-start your pension contributions is now. Here are 5 reasons why.
5 reasons to re-start your pension contributions
#1 – Don’t try and time the market. It’s ‘time in’ the market that counts
If you watch or read the news on a regular basis, it’s tempting to think things are just too scary to be investing right now. You might want to wait until things have calmed down.
Well unfortunately there is always something going on. The only normal is that things are never normal! Think back over the last year, we’ve had Brexit, the US/China trade war and now Coronavirus.
When you invest it should always be for the long term. Don’t try to wait for the best times to invest. It’s impossible to predict.
As an example, if you had invested £100,000 into the FTSE All-Share Index in 1986 and left it there, at the end of 2018 it would be worth £1,871,694.
Now if you had done the same thing in 1986 but then missed the 10 best days of performance (because you were trying to time the market), in 2018 your result would be £992,343. A massive £879,351 difference! See link here for the graph and data from Vanguard.
#2 – Stocks are on sale
Having said don’t try to time the market, now may be a better time to start than any.
World stock markets have fallen significantly as a result of the global pandemic and whilst prices have recovered somewhat, they are still much lower than they were a year ago.
This means the great companies of the world are on sale if you want to buy into them, potentially giving you even greater returns over the long term.
But if you are worried that markets could fall again then look at this infographic. Over the last 50 years in the worst case scenario, the US market took 1475 trading days to recover losses. But usually most recoveries are complete within a year.
The declines are temporary, the advance is permanent.
#3 – A guaranteed 20% return
Regardless of what happens with stock markets in the short term, any pension contribution you make will be guaranteed to give you a 20% return straight away and possibly even a 40%-45% return.
This is all because when you make a personal pension contribution you can reclaim Income Tax.
So if you’re a basic rate tax payer, your pension contribution will be topped up by 25% which reclaims the 20% Income Tax you paid. Higher rate and Additional rate taxpayers can claim more.
Company owners making pension contributions from their company account will mean they create an additional expense that can be offset against income to reduce Corporation Tax. A very tax efficient way to get money out of the company which is important now there have been huge changes to Entrepreneurs Relief.
#4 – Employer top up
If your employed, many companies will increase the share they pay in to match your contributions. So, if you have reduced your personal pension contributions your company has probably reduced theirs too.
It’s time to start re-claiming this free money from your employer by re-starting your pension contributions.
#5 – The Government may remove the tax benefits of pensions
As we all know the government is borrowing a lot of money to support the economy through this difficult time. At some point this money is going to be paid back and the government will be looking at ways to raise funds.
Pensions are an easy target as they can be complicated and not many people understand them.
The government loses around £35 billion each year as a result of pension tax relief so you can see why they might be tempted to reduce the relief available to you.
So get contributing and make use of the tax relief whilst you still can.
Still nervous about making pension contributions?
If you are still nervous about your business or job security then I can understand the temptation to keep as much spare cash as possible.
But with interest rates so low unfortunately cash is not earning you anything at the moment.
You always want to make sure you have around 6 month’s worth of your monthly spending in cash and just accept that it won’t earn anything. That’s not the point of this cash. It’s there for emergencies.
If you have more cash available but still slightly nervous, then maybe consider re-starting just a small amount into pensions. You could always increase this as confidence returns.
Alternatively consider investing inside a Stocks and Shares ISA. It won’t give you the tax relief upfront but withdrawals are tax free. What’s more your money is not locked away like it might be inside a pension if you are under 55.
You can get the money back out of your ISA anytime.
As with any investment it’s still better to consider investing for the long term as you can’t be sure what amount you would get back if you did have to pull the money back out on the short term.
If you would like help understanding what pension contributions are right for you and what level of contributions you need to be making to be able to retire then please secure a free 15-minute call. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.