THE P PLAN
I don’t often write a money tip that involves spending money. But in this column I want to introduce you to a wonderful new savings plan – I call it the P Plan.
P Plan works like this. You put in £100. George Osborne encourages you by putting in another £25 (or £67 if you are lucky enough to earn more than £42,475 and pay higher rate tax). If it’s a P Plan which you pay into at work your employer will probably stump up another £200 (amounts vary but the average is just over twice what you put in). So you have found £100 out of your hard-earned money. But, as if by magic, there is £325 sitting in your savings account. Great, you think, I’ll take it out and go away for a week.
Hang on. It’s good but not that good. The drawback to the P Plan is you cannot take money out of it until you reach 55. Because the P Plan is intended to be used when you get old no longer have a wage to rely on. That might be when you are 70 or more the way things are going but at the moment you can get hold of your P Plan as young as 55. Great, you think, by then there will be a fortune in there. I’ll take it out and go on a cruise.
Hang on, again. Your pension has been subsidised by taxpayers to provide for your old age. So you can’t just take it out and spend it. In fact, you can take a quarter of it out tax-free and blow that on a cruise if you want. The rest of it you have to turn into an income which will partly replace the wages you no longer earn. And you will get an income for life of around 6.5% of the total every year.
So it is a good deal. And I encourage everyone to save into the P Plan.
Why haven’t you heard of it? OK, I’ll confess. ‘P’ stands for ‘Pension’. But would you have read this far if I had used that word?
I was inspired to write this column because Prudential said this week that more than a third of us have stopped paying in to our pension as the fall in living standards bites. Paying into a P Plan (sorry, pension) is bottom on our list of priorities.
But that means we lose the taxpayer subsidy. And, if it is a work based pension, we lose the employer contribution too. So we are giving up free money. I don’t think that’s sensible.
Please think hard before you stop paying into a pension.
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