Are You Struggling to Prepare For Your Retirement? Here’s why you should save into a pension.
Although they might seem complicated, pensions are relatively straightforward. Indeed, it’s worthwhile understanding the benefits of a private pension scheme, as the State Pension is unlikely to provide a sufficient retirement income on its own.
Why you should save for your retirement.
Unfortunately, millions of UK citizens fail to make sufficient financial provisions for their retirement. If you are one of these people, you have three options:
- Extend your working life.
- Downwardly adjust your retirement lifestyle expectations.
- Start saving more.
Many people believe the state pension will provide sufficient income when they retire. However, this is unlikely to be the case. At £179.60 per week, or £9339.20 a year, the full State Pension is unlikely to sustain your retirement. Also, you might not qualify for the full pension if you have not made thirty-five years’ worth of National Insurance contributions. Therefore, don’t rely on the State Pension alone.
Here’s why you should save into a pension scheme.
Deciding to start your retirement savings is an excellent start to preparing for your future. Your next step is to choose your savings method.
Pensions are the most popular means of saving for retirement, and there are certain advantages to saving this way. In straightforward terms, a pension is a long-term savings vehicle with a couple of features that allows your investment to grow faster than otherwise would.
Significantly, pensions qualify for tax relief. This means the money you contribute to your pension is not taxed. Therefore, you are receiving additional money you would not previously have.
With defined contribution pension schemes, your pension funds are invested throughout your working life to provide you with a retirement income. In many cases, you can access your pension funds when you reach 55.
The benefits of tax relief.
When your income rises to a certain level, you will start paying income tax on your earnings. The amount you pay is shown on your monthly pay statement.
However, contributions you make to your pension are exempt from tax. Therefore, the money you would typically have paid to the government goes into your retirement fund instead.
In certain circumstances, you can receive tax relief on your contributions even if you are below the income tax threshold. The situation applies with stakeholder and personal pensions taken out by yourself. It also applies to some workplace pensions, but not all of them.
Employer top-up payments.
To help get the workforce prepared for retirement, employers must now enrol their staff in a workplace pension scheme. This process is known as auto-enrolment.
As well as personally contributing to this pension scheme, your employer will also pay into it. Therefore, you will receive money you would not usually receive. Hopefully, you understand that opting out of a workplace pension would be a bad idea, as you would lose this benefit.
Tax-free cash lump when you retire.
On retirement, with most pensions, you can take up to 25% as a tax-exempt cash lump sum. With a defined contribution pension scheme, you’ll be able to access your funds from age 55. If you choose to take the tax-free lump sum option, you can leave the remainder of your funds invested or take them as taxable lump sums.
The prospect of a tax-free lump sum may seem appealing and, in certain circumstances, can be advantageous. However, you should consider the implications doing so will have for your retirement income. Before making the decision, it may be prudent to consult with a regulated financial advisor. They can look at your pensions, assess your options, and recommend some beneficial courses of action, check out Portafina.
