We’re all getting older, as they say.
Sooner or later you’ll call it a day and retire. When this happens you’ll need to have income in one form or another for your retirement years. That’s why it’s vital to consider your financial position, including how you’ll clear any outstanding debts, while saving into a pension.
For some tips from the experts, we asked the Money Advice Service why you should save into a pension.
1. To supplement your State pension
If you are fortunate you may be entitled to the full State pension when you reach pension age – providing you’ve made National Insurance contributions for the minimum number of qualifying years.
However, you’ll probably struggle to achieve the lifestyle you want without a personal or workplace pension to supplement your income.
2. Get tax relief on your income
Within some workplace schemes your employer may take pension contributions from your pay before they deduct income tax. However when contributing into personal pensions and some other workplace pension schemes your pension provider will claim back income tax at the current 20 per cent basic rate of tax and add it to your pension pot.
This means for every £100 you contribute you add £125 to your pension pot. Higher and additional rate tax payers may claim further relief through their personal tax returns.
3. Get matched payments from your employer
If you’re a member of a workplace pension scheme your employer might agree to pay more into your pension if you do the same. So an employer might match any additional contributions into your pension, usually up to a maximum proportion of your salary, but no less than 1 per cent.
If your employer offers this additional benefit it’s well worth considering – who can argue with extra money being paid into your pension?
4. Auto enrolment makes it even easier to start a pension
Over the next few years the government is making it compulsory for companies to provide their employees access to a workplace pension scheme. You’ll automatically be enrolled if you are at least 22 years of age, working in the UK and earning at least £10,000 a year.
Even if you’re not automatically enrolled you may be able to join the scheme. You’ll have the choice to opt out, but be enrolled back in once every three years if you still meet the eligibility requirements.
5. Take advantage of greater pension flexibility
From April 6 2015, there’ll be more flexibility about how you can access your pension from age 55. You’ll no longer need to purchase an annuity, which is a fixed sum paid to you every year for the rest of your life, and you’ll have the freedom to draw income from your pension as you like.
If you’ve decided to enter a drawdown arrangement – where you take money out of your pension pot – you’ll still benefit from having 25 per cent tax free income, with the rest taxed at your highest marginal rate. For example, 20 per cent if you’re a basic-rate tax payer.
Alternatively, you may take up to 25 per cent of your pension fund as a tax-free lump sum, and use some or all of your pension pot to buy an annuity if you prefer the security of having a guaranteed income for life.
The government has guaranteed the right to free and impartial guidance on your new pension choices, but if you’re still unsure you should consider seeking regulated financial advice from a suitably-qualified adviser.
6. Achieve the lifestyle you want in retirement
It’s difficult to estimate how much annual income you’ll need to live comfortably in retirement, but 50 to 60 per cent of your salary is considered a good benchmark to aim for. This assumes you’ve paid off your mortgage and are debt free.
Don’t forget to consider expenses such as travelling to work which may no longer be relevant and payments like your electricity bill which could rise if you’ll spend more time at home.
Many pension providers offer tools to help you calculate the level of contribution needed. These will also take into account factors like the impact of wage growth and the effect of inflation on your contributions.
7. Start early, and reap the benefits
Like most investments your pension will need time to grow, so the more you are able to invest early on will mean less pressure to increase your contributions later to meet your retirement goals.
Want to read more? Visit https://www.moneyadviceservice.org.uk/en/articles/why-save-into-a-pension
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