Pensions vs. Protection: Do you need both for your financial planning?
When it comes to building a secure financial future, two pillars often come up: pensions (for retirement) and protection (like life insurance or critical illness cover). Both are essential, but knowing when to prioritise each—and how they interact—can make a real difference to your long-term security.
Why This Matters Now
With the Autumn Budget just a few months away, there’s a lot of talk about potential changes to tax rules, especially around pensions and inheritance. The new government faces a significant financial shortfall, and pensions are firmly in the spotlight for possible reforms. That makes now a particularly good time to review your financial planning and ensure you’re making the most of current rules before anything changes.
Pensions: The Long-Term Foundation
Pensions remain one of the most tax-efficient ways to save for retirement. You get tax relief on contributions, your investments grow free from capital gains tax, and you can usually take up to 25% of your pot as a tax-free lump sum (currently capped at £268,275). For most people, building up pension savings should be a core part of their long-term plan.
However, the Autumn Budget is set to bring in a major change: from April 2027, most unused pension funds and death benefits will be included in your estate for inheritance tax (IHT) purposes. This is a significant shift—until now, pensions have been a popular way to pass on wealth tax-efficiently. If you’ve been relying on your pension as an IHT shelter, it’s time to revisit your strategy.
Protection: The Safety Net
While pensions are about building wealth for the future, protection products like life insurance, critical illness cover, and income protection are about safeguarding your family and lifestyle if the unexpected happens. These are especially important if you have dependents or financial commitments that would be hard to meet if your income stopped.
Protection is often overlooked, but it’s the foundation that allows you to take risks and invest for the long term with confidence. If you’re younger, have a mortgage, or a family relying on your income, protection should be a priority—even before maxing out pension contributions.
Timing: Which Comes First?
There’s no one-size-fits-all answer, but here’s a simple way to think about it:
Early career/family stage: Prioritise protection. Make sure you have enough cover in place to protect your loved ones and your income. Start your pension contributions early, even if it’s just the minimum, to benefit from compounding over time.
Mid-career onwards: As your earnings grow and your financial commitments (like mortgages) reduce, you can shift focus to maximising pension contributions. Review your protection needs regularly—especially after major life events.
Approaching retirement: Pension planning takes centre stage. Consider how you’ll draw your income, and be aware of the new IHT rules coming in 2027. Protection may still play a role, for example, in covering IHT liabilities with life insurance.
Final Thoughts
Both pensions and protection are vital parts of a robust financial plan. The right balance—and timing—depends on your personal circumstances, but with big changes potentially on the way, now is the perfect time to take stock. If you’re unsure where to start, consider speaking to a financial adviser who can help you navigate the options and make the most of the current rules
