Much is made of the tax benefits of saving into a pension scheme but there are other benefits to consider.
As many corporate pension schemes and even government pension schemes become unsustainable, the onus to create a comfortable retirement is increasingly on the individual. But, if we are honest with ourselves, by the time many of us start thinking about our pensions it can feel daunting.
Here are our top tips for a more comfortable retirement:
1. Start early
Starting early cannot be stressed enough and is probably the most important piece of advice we can give. Investing even small amounts can make a significant difference to the potential outcomes as you can see below:
Even if finding £20 a month is difficult at 21, it could be a lot easier to find than £117 a month at 60.
The figures above show saving without investing the money. Any money you invest at age 21 will have accumulated 46 years of returns by the time you come to retire; anything invested from 45 has only 22 years.
2. Join your employer’s scheme
Following the introduction of auto-enrolment all employers must now offer their employees a workplace pension scheme, although not all employees are required to join. However, by joining the scheme, not only will you be contributing to your future comfort but your employer contributes too, boosting the total potential returns. This is particularly important if you think you might have a career break at some point in your working life, for example to have a family.
Most schemes employ a ‘salary sacrifice’ model where your contributions are deducted before tax is calculated, making it a simple way to save. If your employer doesn’t offer this kind of scheme, speak to us about setting up a personal pension plan. These non-employer sponsored schemes will assume you are a basic rate tax payer and calculate your contributions net of basic rate tax (so if you want to put aside £100 a month, your contributions will be £80 and the scheme will claim the additional £20 from HMRC). If you’re a higher rate tax payer you will need to claim the additional tax back through your self assessment tax form.
If you’re self-employed, a contractor or have irregular income, consider a Self Invested Personal Pension (SIPP).
3. Top it up
Many schemes allow you to make additional contributions and some employers will match these to a maximum percentage of your salary. You can still invest more but the employer’s matching contribution will be capped. Alternatively, if your employer offers an Additional Voluntary Contributions (AVC) scheme, consider signing up for this. They won’t contribute to it but, again, saving even a small amount into the plan can help over the longer term.
Under current guidelines anyone not drawing a pension can invest up to £40,000 of their taxable income into their pension scheme(s) tax free per tax year unless their total pension savings exceed the lifetime allowance (currently £1,000,000). And remember, using an ISA can increase your tax-efficient savings.
So there we are. Starting as early as you can gives you the benefit of time; joining an employer’s scheme makes saving simple and boosts your savings rate; and investing as much as you can afford can maximise the tax benefits.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.