Have you ever considered quite how important your pension savings are? Your pension plan is a vital part of your financial future. Making informed decisions about contributions, tax benefits and investment options is an important building block towards a stable financial footing in later life.
Contributions are at the heart of saving for retirement. They are the money that you regularly put aside from your pay during your working life. The idea is that by saving little and often over a long period of time, you’ll build up a savings pot that will support you in your later years.
By law, if you’re an employee then the equivalent of 8% of your earnings must go into your pension. In practice, your employer is legally obliged to pay at least 3%, with you contributing a minimum of 5% of your salary.
What this means is that the equivalent of at least 8% of your earnings goes into your pension, but you pay the equivalent of just 5%. Additionally, if your employer ‘matches’ your contributions beyond that percentage (so they pay more if you pay more), it’s an added bonus.
‘Matched’ contributions act as a powerful incentive to retirement saving – they’re like receiving free money towards your future income, and they’re a great way of helping you build up your pension.
A pension is designed to be a tax-efficient way to build a strong financial foundation for later life. The government wants to encourage you to save for retirement, so they give you an extra incentive in the form of tax relief. This money is claimed back from HMRC and added to your pension savings – a type of extra bonus on all the money you save.
Combining employer contributions with tax relief means that every pound you save into your pension is effectively doubled.
Not only that, but you don’t pay tax on any growth in your pension savings. This can be a significant benefit over the decades that your money is invested. When you retire and access your retirement savings, you can also take 25% of them as a tax-free lump sum.
Another benefit of a pension is that you have a vast array of investment options to choose from. The money that is saved in your pension is invested in the stock market and other financial products, with the aim of giving you strong returns over time. You can simply choose the amount of risk you wish to take and let the pension experts manage your money, or you can make your own investment decisions.
Take a read of our member guide to find out more.
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