Why save into a pension?
To ensure you have the standard of living you want when you retire, it's best to start saving into a pension scheme as soon as possible.
The importance of retirement savings
More than half of people in the UK are either not saving at all for their retirement, or not saving nearly enough to give them the standard of living they hope for when they stop working.
If you fall into this category, you can either:
- lower your expectations of the amount of income you'll have in retirement
- start saving more
- retire later
You shouldn't rely on the welfare state to keep you going. Those eligible to receive the full State Pension will get £115.95 a week. This is well below what most people say they hope to retire on.
Setting a retirement income goal is vital here. It gives you something to work towards and helps you figure out how much you will need to save to achieve your income goals.
The advantages of saving into a pension
Once you've decided to start saving for retirement, you need to decide how you're going to do it. Pensions have many advantages that will make your savings grow faster than other forms of taxable investments.
Essentially, a pension is a long-term savings plan where you may be eligible for tax relief on contributions of up to 100% of your annual earnings. The way that you receive tax relief on your contributions depends on the type of scheme you belong to.
Basic rate taxpayers receive 20% tax relief. For instance, if you make a payment of £8,000, the taxman will add £2,000 to make a total contribution into your pension pot of £10,000.
If you are a higher rate taxpayer, you can claim an additional 20% of tax relief in your Self Assessment tax return by calling or writing to HRMC to adjust your PAYE tax code.
If you don't earn anything (e.g. if you don't work) or earn less than £3,600 each year, you can make gross contributions of up to £3,600 each year receiving basic rate income tax relief at 20% on your contribution.
To help people save more for retirement, employers are having to enrol workers into a workplace pension scheme if they are not already in one. This is called 'automatic enrolment' and it is gradually becoming compulsory for all employers.
You will be automatically enrolled if you:
- are not already in a suitable workplace pension scheme
- are aged between 22 and State Pension age
- earn more than £10,000 a year
- work in the UK
There is a minimum total amount that has to be contributed by you, your employer, and the government in the form of tax relief. This total minimum contribution is currently set at 2% of your earnings (0.8% from you, 1% from your employer, and 0.2% as tax relief). These amounts will increase in 2017 and 2018.
You can opt out of this after you've been enrolled, but if you do you’ll lose out on your employer's contribution to your pension as well as tax relief. Staying out is like turning down a pay rise. Opt in unless you cannot afford to contribute or you are currently dealing with unmanageable debt.
Boosting your pension
Your two main options for increasing your retirement income are:
- top up your pension pot by adding to an existing scheme or starting an additional one
- delay the date on which you'll start taking your retirement income
Maximising your pension contributions in the years before retirement brings an immediate boost in the form of tax relief. This is particularly true if you are a higher-rate taxpayer. Find out more about tax relief on pension contributions on the Money Advice Service website.
Delaying when you start taking your retirement income can also boost your pension. It gives you more time to contribute to your pot and more time for your pot to grow, so you may have more savings by the time you retire. Also, annuity rates increase as you get older. If you are considering using your pension pot to buy an annuity, delaying may mean you will receive a higher income in retirement.