Pension or savings: Which is better for retirement?

However close you are to retirement age, it is well worth preparing a financial plan that is as comprehensive as possible for the time when you are no longer working.

If you have a pension, you may think it is unnecessary to also build savings. However, all forms of investment and financial safeguarding have both pros and cons, and the more widespread your financial retirement options, the better.

A balanced approach, where you have both a pension and savings, will set you in good stead. It offers flexibility, a diversification of risk and also tax efficiency. 

“Determining your target income for retirement requires a thorough assessment of your financial situation,” says Lily Megson, of My Pension Expert, talking to the Daily Telegraph.

“Retirement planners must take stock of their existing savings, investments, pension funds, and any other assets earmarked for retirement.”

Pensions are essentially long-term savings plans with tax relief, possibly with employer contributions too, and which will make your savings grow more quickly.

They are only accessible after reaching a certain age, which at present is 55 in the UK, but set to rise to 57 in 2028. 

It is advisable to have a pension scheme in place to ensure a more comfortable retirement than that provided by the state pension claimed from the government (which requires 30 years of National Insurance contributions). 

Pensions can be in the form of a workplace pension,  arranged by your employer and deducted from your earnings each month, or a private pension if you are ineligible for a workplace pension—for example if you are self-employed.

You may want to take out a private pension in addition to your workplace one to boost your retirement funds.

Savings and other investments do not have the tax benefits of pensions, however you will be able to access your money at any time without paying tax.

There are different types of savings accounts, such as ISAs, both regular and easy access savings accounts, notice accounts and fixed-rate bonds.

Both pensions and savings have their downsides as well as their advantages, and therefore having both in your investment portfolio spreads the risks.

Pensions offer tax relief. Contributions are made before tax is deducted, and pension providers are able to claim tax back on your behalf.

Many employers match your pension contributions, which means that what you put in is doubled.

With a pension you also enjoy the benefits of compound interest, where you earn interest on the money you've saved and also on the interest you earn during the term.

The longer the period, the more you benefit from compound interest, and therefore it pays to start making pension contributions as early as possible.

Many pensions can provide an income for life, that is fixed, increasing, or inflation-adjusted.

The two principal drawbacks of a pension are that you can’t access them until you are a certain age, currently 55, unlike with savings, and there is an element of risk as the value of your pension can fluctuate with the market.

Added to that, they can be complex and seen as difficult to understand, although there are lots of guides and other resources available to take away the mystery.

Opting for savings means that you can access your cash more easily than with a pension. They are relatively easy and quick to set up, and if you have an ISA allowance, your savings returns grow free of tax.

You also have a personal savings allowance—the total amount of interest you can earn each year (excluding ISAs) without paying tax.

Cash savings can lose value over time due to inflation, and they do not enjoy the same level of tax advantages as a pension. 

So, pension or savings or both? Pensions perform better because of the tax relief available. But savings are much easier to access. Therefore a mix of both is best for many people, if that is possible.