You might think that pensions are a bit dry and complicated, but the basic concept is relatively straightforward. Nevertheless, it is worthwhile to understand the benefits of a pension scheme, as the State Pension is unlikely to provide enough to sustain your retirement lifestyle.
Why Retirement Savings Are Essential
Unfortunately, millions of people don’t have good plans to save for the retirement they desire. If you are one of these people, you have a few alternatives:
- Work longer.
- Accept a lesser retirement lifestyle.
- Save more.
If you believe the State Pension will provide you with all the money you need to retire on, you should consider what you’ll get. The full State Pension is £179.60 per week, which is an annual income of £9,339. This amount is likely to be well below the amount you need to sustain a comfortable retirement.
Advantages of Pension Savings
When you’ve decided to save for your retirement, your next step is to determine how you’ll save. Probably the most popular form of retirement savings is through a pension scheme.
Pension schemes have several advantages that help your money grow more than it would in other investments. The first is the tax relief that pension contributions enjoy. This relief means that money that would typically have gone to the government goes into your pension pot instead.
Your pension is a long-term investment, so your investment has plenty of time to grow through compound interest. This aspect of your pension can significantly boost the value of your pot.
If your pension is a defined contribution scheme, your contributions get invested throughout your career to give you an income on retirement. In most cases, you can access your pension funds from the age of fifty-five.
Benefits of Tax Relief
You pay income tax on the amount of salary you earn over a certain amount. However, the money you pay into your pension qualifies for tax relief. Therefore, you will have money contributed to your pension that would typically have gone to the government.
If your income is below the tax threshold, you still may be able to receive tax relief on personal or stakeholder pensions you’ve taken out yourself. Even some types of workplace pension schemes will qualify for tax relief. However, this is not the case for all workplace pensions, and you can check with your HR department to see if your scheme qualifies.
Employer Contributions To Your Pension
To help employees save for their retirement, employers are now required to enroll their staff into a workplace pension through a process called auto-enrolment. A tremendous benefit of a workplace pension scheme is that your employer also contributes to your retirement fund. Opting out of a workplace pension is equivalent to turning down a promotion or free cash, as the contributions you get from your employer is money that you would not have otherwise.
Tax-Free Lump Sum
At the age of fifty- you retire, you can take a tax-free lump sum of up to 25% from your pension pot. You can choose to take the remainder as lump sums or leave your money invested in providing a retirement income. However, not all pensions can be accessed at fifty-five, so you’ll need to check your options. You can do this through a regulated independent financial advisor, who can also advise you on the best way to access your pension funds.
Conclusion
Perhaps you will have already considered your retirement and how you will fund the lifestyle desire. Pensions are an excellent way to provide an income for your post-working years. Hopefully, this article will have informed you of the benefits of saving into a pension scheme. Before thinking about your pension, consider using a regulated adviser like Portafina or, view the advice at Pension Wise.
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