14th September 2018 at 8:18am
With Pension Awareness Day this September, we highlight six reasons why you can’t afford to ignore the benefits of saving into a pension, especially with record lows in interest rates for savers over the past few years.
From simplicity and savings, to investing and inheritance, we explain what you need to know.
Maximise your workplace pension to claim all the money you’ve earned
A pension can be a great, tax-efficient way to save, and if you have the option of a workplace scheme your employer will be paying towards your future too.
Since people started being automatically enrolled into their workplace pension, more than 9.5 million people in the UK have joined one.
If you are one of them, you’ll benefit from contributions from your employer into your pot – a minimum of 2% of your salary while you contribute 3%.
If you’re not in your workplace pension scheme or taking full advantage of what you’re entitled to, you’re effectively passing up on money – not something most of us would usually do.
Getting in the saving habit couldn’t be simpler
Once you’re in a workplace pension, it couldn’t be easier to stay in the habit because payments come straight from your salary.
That means money isn’t gathering in a bank account tempting you to spend it – and money in your bank account isn’t going to get much interest due to low savings rates and inflation.
Upping your pension contributions even just a little could make a big difference to your pension pot in the long run.
If you can take little extra steps now, your future self will thank you because it’s increasingly unlikely that you can rely on the State Pension alone to provide the lifestyle you’d like for your retirement. The basic State Pension is less than a minimum wage salary and the age when you can claim it is rising. You could be in your late 60s by the time you are eligible.
Give your money the chance to grow
The great thing about a pension is that any money you and your employer are putting aside for your future is invested and will have the chance to grow, although do bear in mind that a pension is an investment, it can go down as well as up and you could get back less than you paid in.
Where you choose to invest could make a big difference to your future lifestyle and when it comes to choosing and reviewing these investments you’ll want to think carefully about how involved you would like to be and how much risk you want to take, among other things.
Tax relief can be your pension’s secret weapon
Having a big impact on your future prosperity may not take as much out of your pocket today as you might expect because you get tax breaks on the payments you make to your pension.
These are normally at the highest rate of income tax that you pay. This means that saving £100 into your pension pot only normally costs you £80 – or just £60 if you are a higher rate taxpayer (higher rate or additional rate taxpayers may need to claim back anything above the basic rate direct from HMRC). The figures are slightly different for Scottish residents because income tax rates in Scotland differ from the rates in the rest of the UK.
Our guide shows you how pensions are a really tax-efficient way to save. Tax rules and legislation can change and your own circumstances will have an impact on tax.
Pension freedoms give choices
When you eventually come to take your life savings – currently from the age of 55 – pension freedoms mean that you may now have more choice and flexibility. It’s up to you when and how you take your money. But not all pensions will offer these options – check you’re in the pension that’s right for you.
Pass on your savings to loved ones – sometimes tax free
Pension savings can pass to your children or other loved ones, sometimes tax free, and usually without paying inheritance tax (IHT) as pensions aren’t usually included in IHT.
You can find out more about passing pensions on from Pensionwise.
Just make sure you keep your provider up to date with which loved ones should benefit by keeping your beneficiary nomination form updated as your pension isn’t normally covered by your Will. It’s particularly important following major life events such as the birth of children or divorce.
Six good reasons is just the start
We’ve only scratched the surface when it comes to the potential in your pension.
To read more about everything from getting started to making the most of your retirement visit the pensions section on the MoneyPlus site for guides, tips and expert insights.
A pension is an investment and you could get back less than you paid in. Tax and legislation may change and the information here is based on our understanding in September 2018 and shouldn’t be taken as financial advice. Your own circumstances will have an impact on tax.