Key reasons that saving money into a pension is a really smart idea
There are lots of ways to save, and many of them may seem more glamorous than a pension. Even if you’re thinking specifically about money for your retirement, you may be tempted to open a savings account or invest in property instead. But here are some key reasons that saving money into a pension is a really smart idea and is likely to leave you with more cash in the long-run.
Extra money from your employer
New auto-enrolment pension rules mean that your company has to contribute money to your pension as long as you’re making contributions. This starts at a minimum of 1% of your salary from your employer when you contribute 2%. Your workplace may also offer ‘contribution matching’, which means they’ll pay more into your pension if you increase your own contributions.
The government effectively contributes to your pension too, by refunding the income tax you’ve paid on the contributions you make to your pension pot. For example if you pay £8,000 into your pension fund and you’re a basic rate taxpayer, HMRC adds another £2,000, bringing your total to £10,000.
You can get tax top ups of 25% for your contributions. Higher rate taxpayers can then claim another 20% back through their tax returns. The tax relief limit is currently set at £40,000 per year or 100% of your salary (whichever is lower). Any contributions you make over this limit will be taxed at your highest rate of income tax.
Inheritance tax friendly
Pensions fare well when it comes to inheritance tax too. When someone dies, their pension is held outside of their estate. If the pension holder is under 75 years old, their pension can usually be passed on as a lump sum without money taken off for inheritance tax. Older than 75 and inheritance tax is deducted at a rate of 45% for passing on the pension as a lump sum.
A pension plan often gives you an affordable way of accessing a professionally-managed investment portfolio that spreads your assets across a range of funds. Many pension plans will give you the option of several asset categories, including shares, bonds and cash. Diversifying your investments is obviously a good way of managing risk.
Choose what to do with it
A pension is offputting to some because there are restrictions on when and how you are able to access the money. But new pension rules now give you more options. Rather than being obliged to use the money to buy an income for your retirement, you can now opt to take lump sums from your pension pot once you reach the age of 55 (rising to 57 in 2028) and choose to leave the rest of your money invested.
Get into the swing of saving
Many pension plans work by automatically diverting an agreed amount of your monthly income into your pot. This provides a relatively easy way of saving regularly and steadily growing your pension pot for your retirement.