When you are young, pensions are the last thing you think about spending your money on. They are generally too complicated, and you have so many other things to think about spending your cash on.
Also, why would you want to? Your state pension will cover your retirement, right? Wrong!
Read on to discover why you need to save into a pension.
Why Retirement Savings Are Important
Millions of UK citizens fail to save enough to provide themselves with a decent living standard on retirement. If this is the case, you have three options:
- Retire later.
- Save more.
- Down-scale your retirement expectations.
You cannot rely on your State Pension to sustain you through your retirement. Even if you qualify for a full State Pension, it is unlikely that it will be sufficient for you to afford the lifestyle you want.
Advantages of Pension Savings
When you’re sure that saving for your pension is what you want to do, the next decision is how to save. There are several advantages that pension savings offer you to make the money you save grow more quickly than it would do invested elsewhere.
In basic terms, pensions are long-term savings plans that enjoy tax relief. Having tax relief means that the element of your cash that would have been taken in government taxes goes to your pension.
Saving through a Defined Contribution scheme allows you to save money for your retirement throughout your career into a pension’ pot’. The contributions get invested, so they grow to provide you with a pension income when you retire. You can generally access your pension pot aged 55 and over.
Tax Relief Contributions To Your Pension
During your working career, the money you put into your pension pot qualifies for tax relief. So, the element of the money which you would have had to pay income tax on is exempt. This exemption means more money can go into your pension pot, instead of to the government.
Tax relief applies to a stakeholder or personal pension scheme and some workplace pensions, but not all. Even if your income is below the threshold to pay income tax, you can still receive tax relief on your pension.
Employer Top-Ups
To give their workers a better chance of saving for their retirements, employers are now required to provide a pension scheme from your workplace, and enrol their staff into it, in a process called ‘automatic enrolment.’
Not enrolling in one of these schemes is only recommended if you’ve got exceptional circumstances meaning you can’t. Your employer providing such a scheme, making contributions to your retirement, and refusing to enrol, is like saying no to a rise in pay.
Your employer will still contribute to your pension whether you pay into it or not. Whatever your current financial circumstances are, you should enrol into the scheme and pay into your pension.
Tax-Free Lump Sum In Retirement
When you retire, you are generally allowed to transfer up to one quarter of your pension pot into a lump sum payment, free of tax. For those who have built up their pension pots through a Defined Contribution Scheme, you can use the remainder of your pension pot as you see fit after the age of fifty-five.