Posted on 06/06/2024 by Mark Dunning
Paying into a pension from a young age can make all the difference in later life.
Saving into most long-term savings vehicles can have significant benefits due to the power of compounding. By starting early, you give your investments more time to grow and also time to recover from or indeed, take advantage of any bumps in the road along the way potentially leading to a larger fund. Additionally, starting early also gives you longer access to other benefits that certain products may offer. Pension funding can therefore represent a prudent financial decision for long-term security.
Saving into a pension can be very beneficial for several reasons:
Pension contributions bring you various tax benefits. For example, 20% tax relief is applied at source on your pension pot on receipt of a personal payment i.e. a net payment of £80 is then ‘topped-up’ with a further credit of £20 giving you a total payment credit of £100. This represents basic rate tax relief. So, if you are a higher or additional rate taxpayer you can also apply for further tax relief at your marginal rate i.e. the balancing 20% or 25% via a tax return.
Employer contributions benefit from corporation tax relief as it is deemed to be a business expense. Employers will automatically enrol you into a pension scheme where they will also make contributions into your pension at a level usually based upon a percentage of your salary……free money!
Inheritance tax - your pension is also outside of your estate.
A pension is a long-term savings vehicle – it’s as simple as that. By starting early and contributing regularly to your pension, you allow your investments to benefit from compound growth. This means your money can earn returns not just on the initial investment, but also on the returns themselves, leading to exponential growth.
A pension can provide a source of income during retirement, ensuring you have financial stability when you are no longer working. This can also involve receiving up to 25% of the value of your pension tax-free either as a lump-sum, income or a combination of the two. The balance may be paid back to you which is then taxable at your marginal rate of income tax at the time of taking.
You are not obliged to take your pension and ultimately, you can pass it on to nominated beneficiaries.
When you are young, pension planning may understandably not be seen as a priority. With all of today’s challenges, it can be tempting to put something like starting a pension on the shelf to come back to at a later date. After all, retirement is a lifetime away! But by delaying just a little, you could be losing out on a lot. Overall, saving into a pension is a crucial component of financial planning for retirement and can provide peace of mind knowing that you have a secure source of income later in life.
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.
We've helped clients understand the future they're aiming for - and used our experience, knowledge and contacts to help them get there. By getting to know you, we ensure the foundations are in place for long-term successful relationships.
We will review the best and most tax-efficient methods for your retirement plans and can discuss with you the range of benefits available when you come to retire. Using our extensive knowledge of retirement planning - both pre- and post- retirement, to help you meet your future aspirations.
For your peace of mind and to find out how to manage your finances for later life care - whether for yourself or a relative - we can help you understand the process and advise on a range of options.