Is it worth investing in a pension in the UK?

A workplace pension sounds like a no brainer when you consider the money that your company contributes towards your pension. If you opt out of a pension, you're essentially taking a pay cut, aren't you?

I have always assumed that pensions are a good thing, but how good are they in comparison to other investment vehicles? Recently, I've also been wondering what the tax implications are. What would happen if I retire abroad? Would that mean I'd have to pay more tax on my pension earnings? Am I better off opting out of a pension and investing it directly in an ISA? I wasn't sure.

I wanted to try and answer all these questions in this article. It's also the first time I'm making use of Observable. Observable allows you to be an active reader and to interact with this document. I think it's pretty exciting. I hope you like it too.

• ROI at time of pension contribution
• ROI at time of withdrawal
• ROI assuming the investment doesn't grow
• ROI accounting for the growth of the initial investment
• Retiring abroad
• Appendix
• Calculating pension vs direct investment returns after investing in the stock market
• Setup

There are various options for taking your pension. You can take up to 25% of the money built up in your pension as a tax-free lump sum. The earliest you can do this is when you are 55, although this does depend on your pension provider. You’ll then have six months to start taking the remaining 75% which you’ll usually pay tax on.

Oh yes - there's no escape from the tax man. You do eventually end up paying income tax on the remaining 75% of your pot as income from pensions is still taxable income. The income tax rates are all the same as when you were paying into your pension.

As you might expect, you can access your pension even if you move abroad. You still have to pay the UK government tax on your UK income living abroad.

Some key differences to bear in mind:

• You may be taxed on your UK income both by the UK and the country where you’re living unless the country you’re resident in has a double-taxation agreement with the UK.
• I'm not 100% sure about this, but I believe your 25% tax-free lump sum is still UK tax-free even if you live abroad, but it may be taxed by the country you're living in.
• You may not be eligible for a personal allowance unless you are an EEA citizen or the country you're living in is included in the double-taxation agreement.
• Watch out for those pesky bank charges and exchange rates as well.

So, what does all that mean? Say you're a British citizen and you retire in Spain, there is virtually no difference to your pension withdrawals compared to living in the UK. However, if you live in a country where you aren't eligible for the personal allowance or relief from double taxation - you might take a small hit. Oops!