All About Pensions
What is a Pension?
Put simply, a pension is a savings plan that enables you to put money away for later life, usually for when you want to reduce the number of hours you work or retire from work completely. Pension savings get favourable tax treatment as the government is keen for people to save for their retirement.
How Does a Pension Work?
The idea with a pension is that you save money regularly throughout your working life, then when you retire your pension provides you with an income based on what you have saved. This can be in the form of a lump sum followed by regular payment, but each scheme may vary slightly in terms of your options at the end of the plan.
There are many types of pension scheme on the market, including schemes run by employers into which both employer and employee contribute. You can pay into more than one pension or use them in addition to another tax-efficient savings plans, such as ISAs.
Speaking to a Financial Adviser could help you work out the best way to save for your retirement. Make sure you find a regulated financial adviser who is authorised to give you advice and recommend suitable pensions products and investment options.
How Does the Tax Relief Work?
When you save into a pension, the government gives you a ‘bonus’ in the form of tax relief. This means that some of the money you would have paid in tax on your earnings goes into your pension pot, as opposed to going to the government.
Tax relief is paid on your pension contributions at the highest rate of income tax you pay, as follows:
- Basic-rate taxpayers get 20% pension tax relief
- Higher-rate taxpayers can claim 40% pension tax relief
- Additional-rate taxpayers can claim 45% pension tax relief
Can’t I Just Rely on My State Pension?
The retirement age at which men and women qualify to receive a state pension is set to increase to age 68 between 2037 and 2039, and there could even be further increases after that.
For the 2019-2020 tax year, the flat-rate state pension is £168.60 per week for those who qualify for the full amount (you need a minimum of 10 years’ National Insurance contributions to get any state pension at all, and you’ll need 35 years of contributions to get a full state pension).
If you plan to retire before you’ll receive a state pension and/or if you think you will need more than £168.60 per week to support your lifestyle, you should consider supplementing your retirement income by saving into a private pension.
Have I Left it Too Late to Start a Pension?
No matter your age, there is always a value in saving into a pension scheme – especially if your employer is also willing to contribute. Keep in mind too that it’s a tax-efficient way of saving money, so you could get a better return on your savings than you would with a savings account or ISA.