Have You Yet To Start Saving For Your Retirement? Here’s Why You Should Save Into A Pension
Maybe the seemingly complicated nature of pensions dissuades many people from starting financial preparations for their retirement. However, pensions are pretty straightforward, and it’s worth understanding the benefits of investing in a pension scheme.
Indeed, the State Pension is unlikely to provide you with the money you need to sustain your desired retirement lifestyle. Therefore, you should understand why you need to save into a pension scheme.
Why a Pension is Crucial For Your Retirement
Millions of people are heading for a retirement crisis, as they are failing to save enough to sustain themselves when they retire. If you are one of these people, you have three options:
- Start saving more.
- Delay your retirement.
- Downgrade your expectations for retirement.
If you think the State Pension will be sufficient to support you in retirement, you may want to consider how much this benefit amounts to. Today, the full State Pension is £179.60 per week, equating to an annual salary of £9,339. Do you consider this level of income to be sufficient to retire on? If the answer is no, then you need to start saving into a pension.
Advantages of Pension Savings
When you’ve decided to kick off your retirement savings plan, you’ll then need to choose how to do it. One advantage of pensions is that they are specifically designed to grow your savings faster than other long-term savings vehicles.
Pension contributions are eligible for tax relief, meaning that some of the money you would typically have paid to the government goes into your pension. This additional money is effectively a free contribution to your retirement, as you would not receive it were you not in a pension scheme.
If your pension is a defined contribution scheme, your regular contributions get invested throughout your working life. Then, when you reach retirement age, it will provide you with an income, depending on the amount you have invested and how your pension has performed. In most cases, you can access your pension funds from age fifty-five.
Tax Relief On Pension Contributions
When you earn over a certain amount, you will start paying income tax. However, when you pay into a pension, your contributions are eligible for tax relief. Therefore, some of the money that you would have paid in tax goes into your pension fund instead.
Tax relief applies to personal and stakeholder pensions, as well as some workplace pensions. Also, even if your income is below the tax threshold, you may still be able to get tax relief on your pension contributions.
Employer’s Contributions
As part of the national drive to encourage people to save for their retirement, employers must enroll their employees in a workplace pension scheme. This process is known as auto-enrolment, and it applies to all employees over twenty-two and earning at least £10,000 per year.
You can choose to opt out of a workplace pension, but you should think hard before doing so. Opting out means you are effectively turning down free cash from your employer. This money can grow considerably over the years it is invested and benefit from compound interest growth. Therefore, you should only opt-out of a workplace pension as a last resort.
Tax-Free Lump Sum On Retirement
When you access your pension, you can take up to the first 25% as a tax-free lump sum. In addition, if you are enrolled in a defined contribution scheme, you have various options for using your remaining pension funds from age fifty-five. However, this is not the case for salary-related pension schemes.
Whichever option you choose for accessing your pension funds, you should remain wary of leaving yourself short of income when you retire. When looking at options for your pension, get in touch with a regulated financial adviser such as Portafina or, view the info at Pension Wise.
