A pension is simply a way of saving money for your future retirement.
How much should I contribute?
This will depend upon a number of factor’s including your income, available monies to invest long term, the term left until you retire and your desired income in retirement. You may wish to use a percentage of your income as a guide, 5% of your monthly income is not an untypical figure to save each month.
Tax efficient savings
Pensions have one very important advantage – they’re incentivised by the taxman. In fact, the taxman is very generous when it comes to pensions, adding to your pension every time you pay money in.
Basic rate of tax (currently 20%) is available as tax relief on pension contributions meaning for every £80 you pay in, the government will add £20, giving you a total contribution of £100. Higher rate taxpayers may also be able to claim higher rate tax relief through self-assessment returns.
Plus, on top of the tax relief you receive each time you pay into your pension, any potential growth on the money you’ve saved grows virtually tax free over the years.*
Please remember future governments may increase or decrease the amount of tax relief you get.
*There’s a tax on dividend income from UK shares which pension funds aren’t able to reclaim.
Please note, this information is based on our current understanding of taxation law and HM Revenue & Customs practice in the UK. The amount of tax relief you receive depends on your personal circumstances and may change.
New Pension Freedom post 6th April 2015
Radical changes to the way that people can access their pension savings after age 55 have come in to effect from the 6th April 2015. Essentially the new legislation allows in theory for pension savers to access their whole pension pot in one lump sum with 25% of it being completely tax free and the remainder being taxed at their marginal rate.
Secondly it removes the requirement of having to buy an annuity. Instead pension savers can choose to access their pension pot via a ‘drawdown’ arrangement, enabling savers to access their pension monies as and when they need to do so whilst enabling them to keep their remaining monies invested for future potential growth.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.