Before we get into the detail about the best way to prepare for those twilight years, think about this question: would you accept a pay rise on which you had to pay no tax? Read on…
Pensions. Something we save for later, something that never feels like quite the right time to start. Something that, frankly, can be tough to understand.
Some basics first. A pension is not money that you lose forever – think of it as cash stashed in the mattress; it’s still there, just not as income you can include in your monthly salary packet.
It’s also a stash that your employer might add to.
So what’s the trick to getting your pension in great shape for your retirement? Here’s some stuff you should consider:
It goes without saying that the sooner into your career you start saving, the longer your money has to amount. Starting as early as you dare – and that you can afford – gives your investment the chance to attract extra earnings.
Many employers will match your pension contribution as part of your benefits package.
This is essentially extra, tax-free money that you get access to later in life. So, for instance, if your salary is £30,000pa and your matched contribution is 5%, you’ll get an extra £1,500 for the year into your pension fund from your employer.
Because your pension contribution is deducted from your salary before tax is applied, your 12% NI and 20% tax will only be taken from the amount of your salary minus the contribution.
This ultimately means you pay less tax over your lifetime if you pay into a pension.
Similar savings are applied via rebate for those who pay into a pension from their (post-tax) take-home salary.
Based on the contributions you make, HMRC will calculate the value of your contribution amount prior to any tax deduction from your salary.
You will then receive the difference between your contribution and your pre-tax amount. To simplify, if you’re a basic rate taxpayer (20%) who invests £80 of your post-tax salary into your pension, you’ll be supplemented a quarter of that amount – in this case, £20.
When you do come to choose your pension options, the choices can be overwhelming and range from workplace schemes to stakeholder pensions.
Each have different benefits and drawbacks to suit different circumstances. Thoroughly investigate each one to weigh up how best you can accumulate your contributions, your employer’s and any associated investments.