How is a pension different to regular savings?
A pension is a long term saving scheme which allows you to save money for your retirement. By saving a percentage of your income whilst you are working you will be able to still receive an income when you decide to reduce your working hours or stop working altogether.
It differs to regular saving schemes, such as an ISA, as it receives favourable tax treatment.
Pension policy is regularly updated by the government which makes it a fairly complicated area. There are many different types of pension schemes from a company pension to a state pension to a SIPP (Self Invested Personal Pension).
If I have a state pension should I be saving elsewhere?
Unfortunately the state pension is unlikely to provide you with a sufficient income when you retire so you should consider other types of pensions. Another point to consider is the future of the state pension is currently unclear; therefore it is vital to have another source of retirement income.
When should I start saving into a pension?
While the earlier you start saving the bigger your pension pot is going to be, you should never be put off from starting to save for retirement. If you do begin saving for retirement later in life you may decide to make bigger contributions to catch up on any time you missed.
It is also important to remember that saving for retirement is a tax efficient method of saving.
What are the relevant tax breaks?
There are three key tax breaks in relation to pensions:
- Tax Relief – any contribution made to a pension attracts tax relief at the individual’s highest marginal rate.
- Tax Free Growth – unlike savings held in a regular investment which are subject to income tax and capital gains tax any investment that is held in a pension is able to grow tax free.
- Tax Free Cash – from the age of 55 an individual is able to withdraw up to 25% of the total accumulated funds as a tax free ‘Pension Commencement Lump Sum’. The remaining funds can either stay invested, withdrawn as a lump sum or used to provide an annuity
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