For many people, pensions seem like complicated schemes that you only need as you get older. And, anyway, the State Pension will cover you, right? If you're relying solely on the State Pension for your retirement, you will likely need a drastic adjustment to your lifestyle when you retire. Secondly, you may only need your pension when you retire, but you should start saving into it as soon as possible.
Why Retirement Savings Are So Important
Millions of Brits have their heads stuck in the sand when it comes to saving for their retirement. If you are one of these people who aren't saving enough to sustain their retirement, you have three options:
You should not be solely reliant on the State Pension to sustain you in retirement because you might be disappointed. The full State Pension is currently just over £9,000. That's £179.58 to survive on weekly, and that's much less than most people anticipate for their retirement.
Advantages of Pension Saving
Having decided to save into a pension, you need to choose how. There are several aspects to pensions that are advantageous towards helping your savings grow.
In essence, a pension is nothing more than an extended savings plan. One main advantage of a pension is that it comes with tax relief. So, some of your gross earnings that would have gone as income tax instead go into your pension pot.
If your pension savings are made through a defined contribution scheme, your contributions get invested, so they grow throughout your career. These funds will then provide you with an income when you retire. With most pensions, you can access your money from the age of 55.
Topping-Up Your Pension With Tax Relief
When you earn over a certain amount each year, the government will levy income tax on your earnings. The amount you pay in tax should be visible on your monthly payslip.
However, if you pay into a pension scheme, the amount you contribute is free of tax. Therefore, the money you would have paid to the government as income tax goes into your pension fund.
Even if your income is not high enough to pay tax, any pension contributions you make could still get tax relief. This situation applies to stakeholder or personal pensions that you've taken out yourself. It also applies to some workplace pensions, but not all of them.
Topping-Up Your Pension From Your Employer
Employers now have to enrol their staff into workplace pension schemes to help employees save for their retirements. This process is known as auto-enrolment.
If you have access to a workplace pension scheme that your employer also contributes to, you should stay in that scheme unless it is impossible to pay your monthly contributions. Opting out of a workplace pension scheme is tantamount to turning down a pay rise or refusing free money.
Lump-Sum Taken Tax-Free On Retirement
You can generally access up to 25% of your pension pot as a lump sum and with no requirement to pay any tax on it. For defined contribution scheme pensions, rather than salary-based funds, you can generally use the remainder of your pension fund from the age of fifty-five as you wish.
Taking an untaxed lump sum might seem appealing, and it can be a benefit. However, you should check that you will still have enough in your fund to provide you with an income in retirement. Consult with a regulated financial advisor to ensure you're doing the best thing for your situation.
Hopefully, this brief article will help you realise why you should be saving into a pension scheme. Doing so will help give you a more comfortable retirement. Before considering your pension, speak to an FCA Regulated adviser such as Portafina or, view the info at The Money Advice Service.