Saving into a pension plan

A pension plan is a tax-efficient product for retirement saving. When you save into a pension, you currently get tax relief up to £40,000 or 100% of your income. It’s up to you to decide how much to save into your pension, based on how much you can afford and your desired retirement income.

Why save into a pension?

Saving into a pension is one of the key ways to make sure you have enough money for retirement. This is particularly important because the maximum state pension is currently only £8,092 a year, and it may come under further pressure in the future.

Pensions are also increasingly flexible thanks to new pension legislation, which gives you more options for what to do with your money when you reach retirement.

The benefits of saving into a pension

Unlike most other saving products, pension plans can be boosted by employer contributions and by money from the government in the form of tax relief.

1. Employer contributions

New auto-enrolment pension rules mean that your employer must offer you a workplace pension and they must contribute to it as long as you’re making contributions. This effectively means that with a workplace pension plan you get free money from your employer towards your retirement.

2. Tax relief

Saving into a pension plan (whether it’s workplace or personal) means that the government contributes too, in the form of tax relief. You get tax top ups of 25% on contributions that you make, and higher rate taxpayers can then claim a further 20% back through their tax return. This means that for every £100 paid into a pension by a basic rate taxpayer, the government pays in £25, making the total contribution £125. The tax relief limit is currently set at £40,000 per year or 100% of your salary (whichever is lower). You can find out more about this - including information about the new tapered annual allowance coming in for high earners - on our pension contributions page.

3. No inheritance tax

Pensions also fare well compared to other savings products when it comes to inheritance tax. If you die before the age of 75, your pension can usually be passed on as a lump sum without inheritance tax deductions.

4. Diversified

Usually, when you save into a pension plan your money will be invested in a professionally-managed portfolio, spreading your assets across a range of funds. This is a good way of managing risk, as it’s unlikely that all of the asset types will drop in value at the same time.

How much to save into a pension

How much you save into your pension plan depends on several things including how many years you have left until retirement, how much you can afford to contribute and your ideal retirement income. A rough rule of thumb is that you should try to pay 15% of your annual salary into your pension.

Government figures show that in 2012-13 the average annual pension contribution was £3,510 (approximately £292.50 per month), including employer contributions and tax relief.

Remember to consider the tax relief limits when you’re deciding how much money to pay into your pension.

How to save into your pension

If you’re paying into a workplace pension, your employer will usually deduct your contributions from your salary before they pay your wage.

If you have a personal pension, you can save money into your pension plan by setting up a Direct Debit for regular contributions or making one-off payments by bank transfer.

Open a PensionBee plan and you can easily save money into your pension by setting up regular or one-off contributions online. Your employer can also choose to pay contributions into your plan.

Join PensionBee now and take control of your pension saving.

Last edited: 03-07-2016

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