None of this constitutes financial advice or guidance. Just my personal take, written for myself, and I don't guarantee its accuracy. Take independent financial advice for any of your own decisions.

It’s great for tax

The reason it’s often worth locking your money away until retirement is that the government gives huge tax breaks when you do. A basic rate taxpayer can ‘swap’ £80 of regular money outside their pension for £100 of money inside a pension. A higher rate taxpayer can turn every £60 of spendable money into £100 of pension money.

Not to mention that if you’re employed and your employer is paying in too, that’s more free money… and if they’re matching your contributions then that’s even more on top.

It’s a lot of free money, in return for not being able to touch it for a while.

It’s a wrapper

The question “should I put my money in a pension, or in stocks and shares?” doesn’t make sense.

A pension is just a deal you make with the government where they say ‘we’ll give you tax breaks on this money, but in return you can’t touch the money til you’re older’.

What you do with the money once it’s wrapped in the pension ‘deal’ is up to you. It could be stocks and shares… or bonds… or even cash.

If you have your own company, you can open your own pension

It’s called a SIPP (Self-Invested Personal Pension).

You can pay into it personally (from after-tax money, and the government will top it up with the tax you already paid)… or if you run a limited company your limited company can pay into it (from pre-tax money, and it reduces the company’s corporation tax bill).

For many people, the company paying in directly makes sense, because if you pay personally you can only pay as much as your salary (not your dividends) which for many people is only about £10k. The company may be able to contribute up to the £40k annual limit.

You can choose the investments, even if you’re employed

Your employer’s pension provider will start you out on a default investment plan, and it often won’t be a good one.

If you have a long time until retirement, you might be comfortable making longer/riskier plays with the money (e.g. putting it all in a global index tracker) whereas the provider’s default might have a lot of it in low-risk low-growth investments so that it never looks like your money has shrunk very much even for a short time.

Some pension providers will let you choose the investment or risk level when you log into your online account.

If yours doesn’t, and you want control over the investments, you may be able to open a SIPP (Self-Invested Personal Pension) and have your employer pay into this instead.

 Final Salary / Defined Contribution Pensions

If you’re in one of the few jobs that still has an old style of pension that pays decent fixed amounts in retirement, it might be better than index funds / a SIPP. I don’t know any of the details about this yet.

You should still have a pension if you’re planning to FIRE (Financial Independence, Retire Early)

Many people on the FIRE train, who are planning to retire long before standard retirement age, are reluctant to put money into a pension because they’ll need retirement income before age 55.

But this is short-sighted. Unless you’re also planning to die at age 55, you’ll need money after this age as well as before it. So it will likely make sense to get money into the pension to fund you from age 55 onwards (because this money has more tax breaks so accumulates faster), while investing in easier-access ways for the money you’ll need from your actual retirement age until 55.

The challenge is figuring out how to split your investments between pension and non-pension, so that your non-pension lasts until 55 but not too much later.

There are ways to figure this out which I plan to explain in a future article.

Allocating between shares and bonds

It often makes sense to start with riskier investments (maybe even as much as 100% in index funds) if there’s a long time until you can access the money, because it’s so likely the money will grow quickest this way. But the volatility means that as you approach retirement age you should be reallocating more to lower-growth but lower-risk investments like bonds. A temporary huge drop is totally irrelevant in the early days, because you can’t access the money anyway—it should recover before you need it. But you don’t want a huge drop just before you need to access the money.

Entrepreneurs: there’s a trade-off between investing in pensions for later and investing in self for now

How do you reconcile the conventional wisdom that paying into a pension/401k gives unbeatable returns (because tax) with the concept that investing that same money in yourself/business could conceivably return 1,000s%+? @Shpigford @lkr @robwalling @mijustin @ other smart people

— Shai Schechter (@shaisc) May 4, 2021

As you can see from that Twitter thread there are a lot of competing theories here from a lot of bright people.

My conclusion has been to fill my S&S ISA, then keep enough around that you can do all the self-investing you reasonably expect you could possibly want to do in the near future, and then get the rest into a pension until the pension is at the point that it should grow enough to be able to live off it comfortably. But this only works because of my specific financial situation, and depends so much on the specifics of your own.