If you had enough, could you not bother with a pension & just live off savings instead? Is there a rule that you have to have a pension?

[Aop]

Totally ignorant here, that's why I'm asking. Like, lottery winners wouldn't need a pension would they?

A defined contribution pension really is already just savings, albeit with some rules attached as to how it can be accessed and used, but yes, you can use savings if you want.

Why do you ask though? You give up some important tax benefits if you save outside of a pension instead of inside.

I don’t have a pension, but DH has a very good one.
I’m not a fan of them as you can’t get hold of your money when you need it, like you can with an account. So I’m interested in your replies.

I thought everyone who worked was expected to have a pension. You can opt out though. My friend opted out of the teachers pension.

You get tax relief with a pension. If it's a workplace pension you also get employers contributions, so £10 going into your pension only actually costs you £3/4, sometimes a lot less.

Of course there are other ways of funding retirement, like winning the lottery or other investments or property wealth, but for most people it's a really good idea to pay into a pension to help fund their retirement.

A £1 million pension pot would give you around £40k a year for life. Obviously some of that pot would be employers’ contributions and yours would be tax free. If you had £1 million in savings and took £40k a year it would run out in just over 20 years and you’d have had no tax relief as you paid in. The pension comes out best.

A defined contribution pension is essentially just ring fenced savings.

the benefit of a pension over saving outside of a pension is that usually your employer will contribute too and you get a tax break. So if you pay in say £500pcm, you might get £800pcm going into the pension as a result of your employer and tax breaks.

the downside to a pension over say an ISA is there are limits on when you can access it.

Theres no rule say you have to have one, but even very wealthy people usually do because of the tax benefits.

Well, yes in theory I assume if you are a lottery winner or have a huge inheritance you don't need a pension (wonders mildly if the Queen claims her pension?).

But for the majority of us having a pension is the most tax efficient and 'sensible' thing to do.

Where are you seeing 4% annuity rates? That seems very good.

A pension is just savings with certain tax benefits. Up to the lifetime and annual allowances you effectively don’t pay income tax on the money put in, and you don’t pay tax on growth. Then you probably pay a lower rate of tax when you take it out compared to what you saved putting it in.

Savings in a normal cash or shares setting incur tax on interest, dividends, or capital gains beyond their much much lower limits, and the money used to save you have generally paid tax on.

Pensions exist for a reason. Is this theoretical or are you actually in this predicament?

As said upthread, even £1m wouldn't last "that" long. And tax benefits are plentiful in a pension.

But if you had £1M either in a pension pot or savings you wouldn't just leave it there to spend from in retirement, it's not a case of taking £40k pa out of the pot for 25 years until it runs out.

You draw the money down over a number of years and it remains in an investment product that hopefully keeps growing. Which is a good thing, because it's likely that you'll need to increase the money you take out as prices rise. £40k might sound like a decent income at the beginning, but won't be 25 years later.

www.fidelity.co.uk/markets-insights/personal-finance/saving-for-retirement/what-does-a-1m-pension-pot-buy/

And the figure was obviously for illustrative purposes only!

The problem is that your savings will be eroded by inflation as time goes on. Even if interest rates rise, if you are using your capital you'll be getting less and less interest as time goes on.

If your savings were large enough, of course, that might not matter but working out how much you'd need isn't as simple as multiplying the salary you need to live off now by the number of years you expect to live.

Short answer: there is no rule. But for lots of people it may be by far the most effective way of funding your age.

There's no rule you have to have a pension (rather than any other form of savings). The benefit of purchasing an annuity is that it carries on until you die, whereas other forms of saving may run out of you live for a long time. Obviously the converse of that is that people who die relatively young will get poor value from an annuity.

When I do “modest lottery win” daydreams I always chuck some of it in an imaginary pension, it’s just sound financial planning.

How will you fund your retirement if you have no pension? You may need enough money to last 30+ years once retired.

You don’t have to have a pension, you can opt out. But it usually makes sense to have one as the most tax efficient option. Lottery wins are exempt from tax but normal income obviously isn’t. I also pay extra into my pension as a way of minimising student loan repayments as they’ll have been written off by the time I retire.

As said upthread, even £1m wouldn't last "that" long. And tax benefits are plentiful in a pension.

You could survive on less than 40m

40k

Of course you don't have to have a pension, but it's usually the most effective way to save - low risk, high (ish) interest. Unless you have enough money to invest, pensions are the best option for most people.

Pension has tax benefits going in - but the income is taxable when you take it (with certain tax free amounts).

Savings come out of taxed income, and income and gains are taxed as they occur / are realised - but no tax on taxing rhe money to spend.

Lots of people have a combination of things, state pension, employer and or private pension, savings, investments etc.

Lots of people don't have any of these, other than state pension if they are entitled, and rely on pension credits.

You certainly don't need to pay into a separate pension. Plenty of people live off nothing more than the state pension, topped up if necessary by means-testsed pension credit.

How long, and at what rates and age state pension will be available though is worth considering.

I've just turned 50, I've always planned my retirement on that basis that state pension will no longer be around.

The older I get the more that I think it will be when I retire, albeit that my state pension age will be late 60's rather than the 60 I would have thought it would be when i was in my early 20s.

Will it still be something which is available for today's 20yos? I'm not so sure.

That wouldn’t be much of a retirement though. I want to have holidays, weekends away, meals out etc, rather than just sit and wither away in front of the TV.