Today I’m going to take the bull by the horns and talk about Pensions : what they are, why they’re important, and at what age you should start one.
You may be someone who shudders when they hear the word “pension”! But ladies, saving into a pension scheme is potentially your route to early retirement, reducing your hours, or most importantly, working because you want to rather than because you have to.
Did you know you can continue to work whilst taking a pension income, so for those workaholics out there, fear not!
Pensions were introduced over 100 years ago, and they have always been a highly tax-efficient way of saving money over the long-term, designed to create a pot of cash from which you can take a regular income to replace your working salary*. There are tax benefits when you pay in i.e your contributions are tax-free up to £40,000 p.a. or 100% of your salary, whichever is lower, tax benefits as the fund grows, and when you take money out – up to 25% of the fund can be taken tax-free, the rest is taxed as income. Governments offer these incentives to encourage people to save, and to reduce the number of people who are purely dependent on the State Pension.
So when should we start? The simple answer is: from the day you get your first pay cheque. The longer you leave it, the harder it is to catch up on missed time. Too often we focus purely on our immediate financial needs and neglect the longer term.
If you are 35 years old and want to retire on £30,000** a year from the age of 65, you will have to put aside £1,015 a month for the next 30 years. If you delay, and don’t start saving until the age of 45, the monthly sum will rise to more than £1,987 a month.
The monthly numbers may seem scary, but the mantra is “something is better than nothing”. If you have access to a pension scheme with your employer, join it, even if you think you might move jobs in future. Your employer is likely to contribute into your scheme, so if you don’t belong, it’s like accepting a pay cut.
Now, pension schemes do have some restrictions, one of which is that you cannot access your money until you are at least 55. This minimum age will rise to 56 and then to 57 in 2026 as the State Pension age also rises to 67 (and potentially higher). But a pension plan is not the only way to save tax-efficiently for the medium to long term.
If you prefer the idea of having access to your funds at any age rather than 55+, then the flexibility of an ISA might be for you….I’ll explain this in a future blog, as ISAs are a great foundation for any medium to long-term investment plan.
To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, please contact Amanda Redman on 07801 045587, email [email protected] or visit www.amandaredmanfp.co.uk
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
*This description applies to defined contribution schemes, not occupational final salary schemes.
** These figures assume an investment growth of 7% pa. The calculation assumes that no tax free cash is taken at retirement and that the resulting annuity is on a single life basis, with no guarantees, payable monthly in advance and increases each year in line with 3%. The figures shown are examples and are not guaranteed – they are not minimum or maximum amounts. What you get back depends on how your investment grows and on the tax treatment of the investment. You could get back more or less than this. The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstance.