Putting the spotlight on pension investing

When it comes to dinner parties, pensions may not be as popular a conversation topic as house prices but the multiple changes announced over the past 18 months, including collective pension plans, auto-enrolment, higher flat-rate pensions and increased flexibility, are certainly making headlines at the moment.

But the real question for investors is what these changes mean for individuals and whether, after years of being seen as an unattractive option, pension investing has become the best home for your money.

Means-testing and a lower state pension had resulted in a rather regrettable situation in which it was relatively unattractive for some people to save small amounts into a pension, when any top-up might have made them as well off in retirement as if they hadn't saved at all.

This situation was highlighted as being a reason not to invest and while the number of people this may have affected was small, it was enough to put off larger numbers of would-be pension investors. However, the new higher flat-rate pension, which comes into effect from 2016, means all pension savings will directly contribute to a higher level of income in retirement, which is certainly good news.

Annuity abolition

The flat-rate pension on its own was already reason enough to look at pensions once again but the Chancellor's Budget speech, where in three minutes he did more for savers and investors than had been achieved in the previous 20 years, has firmly positioned pensions in the spotlight and appears to have definitively tipped the balance in favour of pension investing.

Pensions have gone from being an unattractive investment option to probably the most appealing and tax-efficient home for your money"

The abolition of the requirement to buy an annuity and the ability to access your entire pension fund from next April are major enhancements and quite clearly make pension investing more compelling than ever before. Not only will you continue to receive up to 45% tax relief on contributions but you will also still be able to withdraw up to 25% of your pension tax-free, with the flexibility to do what you like with the rest.

Many investors have steered clear of pensions as a result of their patchy reputation and their inflexibility but the forthcoming rules make it absolutely essential for people to review their pension options. If your employer offers to contribute to a pension on your behalf, this is a huge benefit and even if you have made the decision to opt out previously, you can change your mind now.

Auto-enrolment

In addition, many companies will be writing to their employees about automatic enrolment and this is also something to consider (but the chances are that any employer scheme will be better, so if you have a choice of both then look carefully at your options).

However, it is not enough to make the decision that you will take advantage of the better pensions prospects on offer. The main decision that determines how well off you'll be in retirement revolves around where to invest - which can often be the most difficult choice to make. For this reason and because the vast majority of investors never change from their original pension investment choices, the prospect of collective pension schemes is also an interesting development.

The idea that you could invest alongside thousands of others to try to achieve a target return is certainly worth exploring but the verdict is currently mixed in terms of whether it will provide the sort of income enhancements that have been suggested. However, if it enables people to get lower fees and to potentially take the right level of risk for their age and profile, then it is certainly an idea worth investigating further.

Almost overnight, pensions have gone from being an unattractive investment option to probably the most appealing and tax-efficient home for your money. Even if you've overlooked them before, now is the perfect time review your long-term retirement planning and take advantage of their new-found benefits.