You might consider pensions to be complicated financial vehicles, but the basic concept behind them is simple. If you believe that you’ll be fine with only the State Pension to fund your retirement, you are likely to be disappointed. You will need more than this for a comfortable retirement, so read on to discover why you should save into a pension.
Retirement Savings Are Crucial
Millions of Brits are not adequately preparing themselves financially for their retirement. If you are one of these people, you are left with three options:
- Work longer.
- Reduce your retirement lifestyle expectations.
- Start saving for your retirement.
You might find this to be a bit of an eye-opener, but the maximum State Pension is £179.58 per week, which is an annual income of just over £9,000.00. Could you maintain the lifestyle you want on this amount? Even if you qualify for this maximum amount, most people hope to have a retirement income well above this level.
Saving Into a Pension
Having decided to save for your retirement, you now need to determine how you will save. Pensions are one obvious choice for this, and there are several benefits in doing so.
One of the main benefits is that pension savings qualify for tax relief. Receiving tax relief means that what you would usually have paid of that money as income tax gets paid into your pension fund instead.
Saving through a Defined Contribution Pension scheme means that your contributions get invested throughout your career and benefit from long-term growth. With most pensions, you can now access your funds from the age of fifty-five.
Benefits of Saving Into a Pension
1. Pension Contributions Tax Relief
When your earnings reach a certain level, you are required to pay tax on your earnings. You can view the amount of tax you pay on your monthly payslips. Saving for a pension means some of the income you would have paid in tax goes to your pension rather than the government.
So, not only will you be saving some of your own money, but you will also effectively be getting a contribution from the government towards your retirement. Tax relief applies to personal pensions, stakeholder pensions, and some workplace pension schemes, but not all of them. Even if you do not earn enough to pay income tax, you can still receive tax relief on your pension contributions in certain circumstances.
2. Workplace Pension Top-Ups By Employers
Employers are now required to enroll staff into a workplace pension scheme if they are aged twenty-two or above and earn at least £10,000 per annum. This process is known as auto-enrolment, and it is designed to help people save for their retirement.
A significant benefit of a workplace pension is that your employer makes contributions equivalent to 3% of your salary. This contribution is money that you would not otherwise receive, so it is effectively free. Therefore, opting out of such a pension scheme could cost you thousands of pounds. It would be the equivalent of turning down a pay rise.
3. Tax-Free Lump Sum On Retirement
There are various options for drawing your pension, depending on the type of pension you have. You may be able to take 25% of your pension as a tax-free lump sum from the age of fifty-five. However, it may leave you short of income for your later retirement if you choose this option. Therefore, you should consider it carefully and get regulated financial advice if you are uncertain of doing what’s best.
Conclusion
If you are still unsure how you’ll fund your retirement, now is the best time to decide. Hopefully, this article will convince you why you should save into a pension for a more comfortable post-working life.
Before considering your pension, speak to an FCA Regulated adviser such as Portafina or, view the info at The Money Advice Service.