Many people find pensions complicated and uninteresting. However, the basic premise of pensions is simple: to have money coming in when you stop working. Because let’s face it, you can’t work forever and you still want to do things beyond paying bills when you retire.
Although you might think you don’t need to understand pensions because you will receive the State Pension, you are wrong. The State Pension is an excellent supplement, but it is unlikely to sustain your retirement on its own. Depending on how and where you live, your state pension may barely cover your basic expenses.
Don’t be caught off guard or unaware. What if you live 20-30 years beyond retirement? Taking financial advice from a regulated advisor such as Portafina is highly recommended, especially if you don’t know where to start or how much you will need to retire comfortably.
Here’s Why You Should Save Into a Pension:
Why are retirement savings important?
Unfortunately, millions of UK citizens fail to save sufficiently to achieve the retirement lifestyle they want. If you are one of these people, you have a few options:
- Continue working.
- Downwardly adjust your retirement lifestyle aspirations.
- Save more.
As mentioned earlier, the State Pension is unlikely to sustain your retirement. Indeed, the maximum amount you can receive currently is £179.60 per week. Consequently, you should not think qualifying for the State Pension means your retirement planning is complete.
Advantages of saving into a pension.
Pensions are not the only way to save for your retirement. However, they come with significant advantages that make pensions the most common long-term retirement investment. These advantages help your pension funds grow considerably more than other investments would.
Pensions are effectively long-term savings plans with the following advantages:
- Tax relief.
- Employer contributions.
- Tax-free lump sum on retirement.
The basic principle behind a pension is that you save throughout your working life, and your accumulated fund provides you with an income during your post-working years. With many pension schemes, you have the option to access all or part of your funds from age 55.
Tax relief.
When you start earning over a certain amount, the government takes a proportion of your income as tax. However, the element of your salary you pay into your pension qualifies for tax relief. This means that money that would have gone to the government instead gets paid into your pension pot.
With certain types of pensions, you can still receive tax relief on your pension contributions even if your salary is below the tax threshold. However, this does not apply to all schemes. Therefore, you should check with your provider or employer to see if it does for you.
Employer contributions.
Employers are legally obliged to auto-enrol their staff in a workplace pension scheme. In addition to your payments to this pension pot, your employer also contributes.
These additional funds from your employer are money you would not receive if you opt-out of the workplace pension. Therefore, you should always remain within a workplace pension scheme unless your debt level makes it impossible. Indeed, opting out would be equivalent to turning down a pay rise.
Tax-free lump sum on retirement.
Another significant advantage of saving into a pension is receiving a tax-free lump sum on retirement. Also, many pension schemes come with the option to access your funds from age 55.
Although you may have the option to do so, taking too much money from your pension pot too early could leave you short of income later in your retirement. To help you make the right decision, you should consider discussing your options with a regulated financial advisor.
Of course it is always best to start retirement planning early into your work life, but it is never too late and in fact, even more important to get your finances organised the older you are. If you are over 50, it is time to get informed and start saving so that you can realize the retirement of your dreams.