Question Of The Week: Are Pensions For The Over Fifties Worth It?

It's been a busy week at The Fool's Q&A forum. Of all the questions asked, find out which is Jane Baker's favourite.

It's Friday again which means it's time for Question of the Week! Here I'll answer my favourite question which has been asked on our Q&A forum in the last seven days.

This week I've decided to continue with the pensions theme. Last Friday I discussed whether it's a good idea for younger people to start investing in a pension now. So this week -- in the spirit of fairness -- I want to talk about pensions for older savers, and mull over whether it's too late to start a pension if you're already in your fifties.

Thanks go to Deelighted for this week's question:

Is now a good time to start a pension aged 50+?

Deelighted says:

"This was posed as your weekly question but aimed at 24 yr olds. Why? Many of us thought the state would provide our pensions....but it seems that will not happen AND we'll have to work until 70 due to older populations and better life expectancy. So what do we do and have we missed the boat in our 40's, 50's or even 60 as a time to invest?

Property was seen as the best investment but in the current market think credit crunch aka recession. Call it what it is. Humbug to political correctness. It's beginning to look like all is lost..."

Before I tackle this question it's important to point out I don't know Deelighted's financial circumstances. I don't know about current pension provision to date, if any, or when Deelighted is planning to retire. But to answer this question generally, I'll assume Deelighted is 50 and hasn't yet started to save in a pension scheme.

This time last year I wrote Pensions: Five Top Tips For Late Starters, which should give anyone in this situation an idea of how to tackle their pension provision later in life. Deelighted is certainly not alone.

Stock market investing

If Deelighted plans to retire at 65, that means a pension started now could be invested on the stock market for 15 years -- or longer if retirement is delayed beyond 65. But is this enough time to invest in shares?

Opinion on this point is divided:

AllTorque says:

"... in my opinion I think there may be some very good opportunities for growth over the next 10 years or so. Although we may not have seen the bottom of the market yet, we have had falls of over 40% in a year and in the long term that makes this a good time to be looking at the markets again especially if you're investing monthly."

(Read AllTorque's full response and others here.)

On the other hand JoeEasedale says:

"I think that it [stock market investing] is a very high risk strategy in the current climate. We may be facing ten years of depression, deflation, inflation; stock market falls far greater than we have already had...I cannot see the sense in starting any new [pensions] right now."

(Read JoeEasedale's full response here.)

It really comes down to how comfortable Deelighted is with the idea stock market investing. If Deelighted wants to try for a better return than cash savings, then arguably shares are the place to be based on historical performance.

But we can't be certain how shares will do over the next 15 years or so. Personally I think predicting a downturn for the next decade like JoeEasdale is a little pessimistic, although I could easily be wrong.

I think an investment timescale of 15 to 20 years should still provide some capital growth on Deelighted's pension savings. If Deelighted decides to set up a pension now, I would suggest taking advice from an independent financial adviser on choosing a suitable scheme, and deciding where to invest the pension contributions.

It's important for Deelighted to save as hard as possible in this new pension to make up for lost time.

Cash ISAs

So what should Deelighted and other risk-averse folk want to steer clear of shares? As an alternative, cautious savers could consider saving in cash ISAs instead which provides tax-free interest and no risk to capital.

However, with the Bank of England base rate falling, returns from cash ISAs have dropped off lately. The best buys provide a return of around 4.50% gross, with a maximum investment of £3,600 a year.

Nevertheless, if Deelighted hasn't used up the ISA allowance already, it's possible to save a maximum £300 a month. Do this for the next 15 years in a cash ISA paying 4.50% and you could build up a tax-free lump sum of more than £76,000. (Although this amount will be worth less in real terms once inflation has been deducted.) But this assumes £300 is affordable, which it may not be.

Do you need a pension?

Well, if Deelighted already owns a property, you could argue that no pension is needed. That's because Deelighted may be able to tap into its value in retirement. This can be done by downsizing to a smaller property to take a profit from the sale, or by releasing capital from the home through an equity release scheme.  Neither option may seem appealing right now in the face of weakening house prices. But I would be surprised if values don't recover over the next 15 years.

However, even if the housing market does recover,  the value of the property may not be sufficient to provide a decent income.

Another issue is means-tested state benefits. If Deelighted is only able to save small amounts for a pension, you could argue that it's not worth saving at all. That's because income from a pension -- even a pretty small one --- can affect entitlement to means-tested benefits such as pension credit and housing benefit. So despite saving a small amount, Deelighted could actually end up worse off. (Read more about means-tested benefits here.)

However, I think that's a pretty risky approach as there's no guarantee that the government will pay out the same means-tested benefits in the future. So I reckon the prudent approach is to save whatever you can.

Assuming Deelighted has some spare cash, its best to start squirreling it away now, and remember that all is definitely not lost.

Watch out for Question of the Week #4 next Friday.

Editor's Note: This article should not be seen as individual advice for Deelighted. We don't know Deelighted's financial circumstances so we can't say for sure whether saving in a pension is appropriate now.

More: Question Of The Week #2: Is Now A Good Time For Me To Start A Pension? | Question Of The Week #1: Index-Trackers Versus Investment Trusts