Although pensions may appear to be complex, their basic principle is relatively straightforward. This brief article sets out to inform you why it’s a good idea for you to save into a pension scheme.
Retirement Savings – Why Are They Critical?
The stark reality is that millions of people are failing to save sufficiently for their retirement. For these people, there are three options available:
- Delay their retirement.
- Start to save more for their retirement.
- Make a downward adjustment of their lifestyle expectations for retirement.
You may be thinking that you’ll be able to survive on the State Pension when the time comes to draw that. However, you should be aware that the full State Pension is only £179.60 per week. Therefore, if this is your sole source of retirement income, you’ll expect to live on an annual salary of £9k.
Even if you qualify for the full State Pension, you should not rely on this alone to support you. More than likely, this amount will fall far short of providing the lifestyle you desire on retirement.
When you’ve decided to save into a pension, you then must choose how you’ll do it. There are several advantages to pension savings that enable your money to grow faster than usual, such as tax relief.
Pensions are simply a savings vehicle, but for the long term. Having tax relief on your contributions means you’ll be saving money that you would not otherwise have. Project these “free” contributions over the decades you’ll potentially save into your pension, and it adds up to a significant amount of money.
Saving via a defined contribution pension means your money will get invested in the stock market so that it grows throughout your working years. Then, when you retire, your pension should have matured sufficiently to provide you with an income. Although, you may not have to wait until you retire to access your pension funds, as you can generally do this from age fifty-five.
Pension Tax Relief
As I’m sure you are aware, when your earnings exceed a certain level, you pay income tax. The amount you pay each month should be marked on your payslip.
However, the money you contribute towards your pension is exempt from tax. Therefore, an element of your salary that would typically have gone to the government goes into your retirement fund.
Even if your income is below the income tax threshold, you can still receive tax relief if you contribute to a pension. However, this is not the case with all pensions, just those private or stakeholder pensions taken out by yourself and some workplace schemes.
Workplace pensions were introduced to help employees save for their retirement. Employers are now required to automatically enroll their workers into these pensions through a process known as auto-enrolment.
Workplace pensions are a great way to build up your retirement funds, and you should remain in your scheme unless paying unmanageable debt makes it impossible. Leaving a workplace pension scheme is like refusing a pay rise. Your employer makes contributions to your pension pot that you would not get if you opted out. Similarly, you would miss out on government tax relief on your pension contributions.
Tax-Free Cash On Retirement
Generally, you can access up to 25% of your pension pot tax-free. With defined contribution pension schemes, rather than a salary-related pension, you can use the remainder of your pot from age fifty-five in whatever way you wish.
However, you should be aware that taking too much of your pension fund early as a lump sum could leave you short of income when you retire. Before making any decisions about your pension, you should speak with a regulated financial adviser. They can discuss your options and ensure you’re making the right decision.