Are pensions worth it?

The benefits of pensions, including tax benefits and a comparison of pensions against other savings accounts such as ISAs.

Today, there are a wide variety of ways to save for the future. Why should you open a pension when there are so many great alternatives?

In this article, we'll look at the benefits of pensions and why they might be right for you.

Are pension plans good?

Pensions provide a simple, tax-efficient way to save for life after work. A pension is a long-term investment, giving you the tools you need to grow your savings and fund your lifestyle in the future.

A good way to think about pensions is a life-long savings account. As you go through your career, your pension comes right along with you. Because of the prolonged period, you're contributing into your pension, the opportunity for growth tends to be higher than any regular savings account.

Over time, pensions tend to offer more growth than a regular savings account.

Then, when you're ready to access your pot, you have a few different options. This is where the flexibility of pension withdrawal really shines.

Here are a few of the ways a pension can help you get the most out of your money.

Tax benefits

Every time you contribute into a pension, the government adds a bonus on top via tax relief.

Let's say you add £100 to your pot. If you're a basic rate taxpayer, you'll get £25 extra in your pot free as tax relief. That's because you pay 20% of your income as tax - 20% of £125 is £100, and that's your free top-up!

Higher rate taxpayers will get even more out of a pension. That same £100 would become £166 if you earn over £50,270 - although you will have to claim some of this via a self-assessment tax return.

You can also withdraw the first 25% of your pot completely tax-free when you're ready to access your pension. You can take out the rest in a few different ways, depending on your circumstances.

For more information about the tax advantages of pensions, check out our article on pension tax relief.

How do pensions compare to other saving accounts?

In the UK, we have many options for saving our hard-earned money. Let's take a look at how pensions compare to a few of the alternatives.

Pensions vs ISA

As a method of saving for the future, pensions are often compared to an Individual Savings Account (ISA)

Pensions and ISAs both offer a tax-efficient way to save for the future, however, a pension might be better for you if:

  • You don’t need (or want) access your savings until you’re at least 55
  • You don’t want your retirement savings to be counted as part of your estate for inheritance tax purposes
  • You want to take advantage of the tax relief (or any other tax benefits) on the amount you are saving
  • You want the option of being able to save more than £20,000 (ISA limit for 2024/2025 tax year) each year

For more on this, head to our pension or ISA comparison.

If you’re not sure what option is best for you, then you should speak to a financial adviser who can carry out a review of your specific circumstances and suggest the best savings strategy for your goals.

Pensions vs Lifetime ISA

Another popular way to save for later life is through a Lifetime ISA (LISA)

As with pensions, you'll get 25% back on your contributions as tax relief. However, with a LISA, this bonus is capped at £4,000. This is where the power of a pension comes in.

You can get tax relief from a pension on up to £60,000 a year (or 100% of your earnings), meaning your potential tax bonus is significantly higher - particularly for higher earners.

A LISA also has a lifetime limit of £128,000 - that's the full amount you can hold in your Lifetime ISA and still benefit from tax relief. The maximum amount you can add to your pension (while still getting all the tax advantages is currently £1,073m.

Here are a couple more reasons a pension might be the better option for you:

  • You are over 40 (you need to be aged between 18 and 40 to open a LISA)
  • You want to continue contributing and growing your savings in later life

Get started in 5 minutes

1. Get a Penfold account by registering your details online or with our app.

2. Transfer an existing pension, or make a one-off or recurring payment (pause or adjust any time).

Done! Check savings progress, change investment plan and more with our app or online dashboard.

Get started now