Pensions may appear complicated initially. However, they are relatively straightforward financial vehicles. Although your state pension will provide you with an excellent supplement to your retirement income, it’s unlikely to be sufficient to live on. Therefore, you should understand the benefits of pension schemes and why you should start saving into one. It's critical to prepare ahead for your retirement and get professional assistance from a financial expert like Portafina.
Retirement savings are crucial.
Having sufficient funds set aside for your retirement is crucial. However, millions of people have insufficient plans in place to sustain themselves for when they retire.
If you are one of these millions, you have several options:
Extend your working life.
Downwardly adjust your aspirations for retirement.
Start to save more for your retirement.
What about the state pension, you may ask? You should not rely on the state pension as your sole means of retirement income.
The maximum state pension currently is £179.60 per week. This equates to an annual income of £9,339.20 which is unlikely to provide you with the retirement lifestyle you want.
Advantages of pension schemes
Pensions are not the only way to save for your retirement. However, they do come with some significant advantages, including the following:
Tax relief.
Employer top-up contributions.
Lump-sum payment.
Pensions are essentially a long-term savings plan, specifically designed to give your funds growth that they would not achieve otherwise. Let’s take a look at these advantages in a bit more detail.
How tax relief can boost your pension funds.
As you’re probably aware, the government takes some of your income as tax once you start earning over a certain amount. The amount you pay in income tax shows on your pay statement each month.
However, if you make pension contributions, the amount you pay into a pension scheme qualifies for tax relief. This means that money that would have typically gone to the government goes into your retirement fund instead.
Even if your salary is below the tax threshold, you still may qualify for tax relief. This situation applies to specific personal or stakeholder pension schemes and some workplace pensions. However, not all workplace pensions offer tax relief if you are under the income tax threshold.
Employer top-up contributions.
Employers are now legally required to enrol their employees in a workplace pension scheme through a process known as auto-enrolment. This legislation was introduced so that people can save for their retirement more easily.
An excellent aspect of a workplace pension is that your employer makes top-up contributions to supplement what you pay into your scheme. These top-up contributions are money you would not typically receive were you not enrolled in the workplace pension. Therefore, you should remain in the scheme and only update as the last resort.
Tax-free lump sum payment on retirement.
Recent changes governing how to access your pension mean that you can now access 25% of your funds as a tax-free cash lump sum when you retire. In many cases, you can get this benefit from age 55, but not all pensions offer it.
Schemes that allow you to access your funds from age 55 include defined contribution pensions, but not those that are salary-related. Even if your pension scheme enables you to do so, you should consider the implications of taking too much cash from your pension pot. Although it may seem appealing at the time, it may leave you with insufficient income for when you fully retire.
Conclusion
Pensions are an excellent savings vehicle for your retirement. Hopefully, through reading this brief article, you will now understand why you should see into a pension scheme.
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