If you are unfamiliar with pensions, you may think that they are complex. However, the basic principle of a pension is relatively straightforward. Therefore, it is worthwhile to understand the benefits a pension can bring you.
Although you might think you are sorted for retirement because you’ll receive a state pension, this money is unlikely to sustain a comfortable lifestyle on its own. That’s why you must start saving into a pension scheme. Getting professional and regulated financial advice will help you with planning for your retirement, check out Portafina.
Retirement savings are crucial.
Unfortunately, millions are failing to save sufficiently for their retirement. If you are one of these people, you have a few options for achieving the retirement lifestyle you desire:
- Continue working beyond your planned retirement age.
- Save more into your retirement fund.
- Downwardly adjust your retirement lifestyle expectations.
As mentioned above, the state pension is unlikely to be sufficient to support your retirement. The maximum amount you can receive is £179.60 per week, equating to an annual income of £9,339.20. Do you think you could live on this? It certainly falls short of the income most people hope to retire with.
Advantages of a pension.
Hopefully, you will have understood the importance of building up a retirement fund by now. Next, you need to decide how you are going to achieve this.
Pensions are an excellent financial vehicle for growing your retirement fund. They come with several significant advantages that allow your money to grow more quickly than it otherwise would.
In straightforward terms, a pension is a long-term savings plan that benefits from tax relief. Tax relief on your contributions means you receive money that would typically go to the government. Instead, this money gets invested into your retirement fund.
With defined contribution pensions, your money gets invested throughout your career. Compound interest and tax relief accumulated over many years mean your contributions have plenty of opportunities to grow significantly. Generally, you can access your pension funds from 55.
Tax relief on your pension funds.
When you earn a certain income level, you pay tax to the government. The amount you pay is shown on your monthly payslip.
However, if you make pension contributions, you receive tax relief. This means you receive money that you would not typically have received. This money gets invested into your future by boosting your retirement fund.
Personal and stakeholder pensions and certain types of workplace pensions qualify for tax relief even if you are earning under the tax threshold. However, this is not the case with all workplace pensions.
Employer top-up contributions.
To help the workforce prepare for retirement, employers are now legally bound to enrol their employees into a workplace pension. This process is known as auto-enrolment.
Your employer will contribute a minimum of 3% of your salary’s value towards your pension fund. As you would not typically receive this money, you should not opt-out of your workplace pension. Doing so would be similar to turning down a pay rise or refusing free money.
Tax-free lump sum on retirement.
Another significant benefit of saving into a pension is receiving a tax-free lump sum on retirement. Typically, you can take up to 25% of your total pension fund without having to pay any tax.
With defined contribution pension schemes, you can access your funds at 55, but this is not the case with salary-related schemes. You can either leave the remainder invested or take it as taxable lump sums if taken your tax-free lump sum.
Before deciding to take the cash, you should consider the impact on your retirement income. Therefore, it’s a good idea to get advice from a regulated financial advisor to ensure you’re making the right decision.
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