Although you may consider pensions to be complex financial vehicles, they are, in fact, relatively straightforward. However, you must understand the benefits of pension savings. Relying on the State Pension will not provide you with a suitable retirement income. It is always recommended that you use the services of a regulated advisor like Portafina when making financial decisions and preparing for your retirement.
Why it is important to have retirement savings
It is a sad fact that millions of people are failing to prepare for their retirement sufficiently. If you are one of these people, do you have one of three options:
- Decide to retire later.
- Downwardly adjust your retirement expectations.
- Start saving.
If you think you will cope with having the State Pension as your sole source of retirement income, perhaps you may want to consider how much you will receive from this benefit. Currently, the maximum State Pension is £179.60 weekly, which means you receive around £9339 annually. Is this sufficient to sustain how you want to live in retirement?
Advantages of pension savings
Having decided to start pension savings, you next need to determine how to do it. There are several significant advantages with pensions that allow your savings to grow much quicker than they typically would otherwise.
In essence, your pension is no more than an extended savings plan. However, the money you contribute to your pension fund receives tax relief from the government. Therefore, the money you would not typically have had goes towards saving for your future.
If your pension fund is part of a defined contribution scheme, your contributions get invested in stocks and shares so that they can grow throughout your working life and provide an income when you retire. With such schemes, you can generally access your pension funds from the age of 55.
Topping up your pension with tax relief
As I’m sure you know, once you start to earn over a certain level, you will pay income tax on your earnings. Your employer should mark the amount you pay in tax on your monthly payslip.
Receiving tax relief means that money that would have gone to the government goes into your pension pot. Even if your income is below the tax threshold, you can still receive tax relief through some private or workplace pension schemes. However, this is not the case with all pensions, and you should check with your provider whether this applies to your situation.
To help the workforce prepare for their retirement, employers are now obliged to enrol certain employees into a workplace pension scheme. This process is known as auto-enrolment.
Part of the money that goes into your workplace pension comes in the form of employer contributions. This money is funds that you typically would not have were you not enrolled in a workplace pension. Therefore, you should stay enrolled in the workplace pension unless it is impossible not to. Opting out of a workplace pension is comparable to turning down free money.
Tax-free cash lump sum
When you retire, you can normally access up to a quarter of your pension funds in the form of a tax-free cash lump sum. If you are part of a defined contribution scheme, you can access these funds when you reach 55.
However, before taking too much of your pension fund as a cash lump sum, you should consider the impact this could have on your retirement income. Making any decisions regarding your pension can be daunting. Therefore, it may be good to get professional help from an independent financial advisor to ensure you are making the right decision.
Pensions are the most common method of preparing yourself financially for retirement. You must understand the advantages of saving into a pension fund and start your savings as soon as possible. Doing so will give you the best opportunity of amassing a pension pot sufficient to enable you to have a comfortable retirement.
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