Although pensions may appear to be complicated, they are pretty straightforward. However, one thing you should certainly understand about them is that you should start contributing to one as soon as possible.

Many people who fail to pay into a pension think they can rely on the state pension to provide for their retirement. Although it may be an excellent foundation to retire on, the state pension is unlikely to sustain your retirement alone.

Retirement savings are crucial.

The reality is that millions of people are failing to save for their retirement. If you’re one of these people, you have three options:

  • Work longer.
  • Reduce your retirement expectations.
  • Start saving.

As mentioned earlier, the state pension is unlikely to provide for all your retirement needs. Currently, the maximum you can receive for the state pension is £179.60 per week. This amount equates to an annual salary of just £9339.20. Do you think this is sufficient for you to retire on?

Pension advantages.

Pensions are not the only way of saving for your retirement, but there are certain advantages to using these financial vehicles. These advantages allow your pension to grow faster than it would otherwise.

Pensions are a long-term service plan, but they benefit from tax relief. The tax relief you get on your pension contributions is money that you would not usually have as this would typically go to the government.

Saving through a defined contribution pension scheme means that your regular pension contributions get invested, generally in the stock market, so that they can grow throughout the lifetime of the pension. This growth allows them to provide you with an income on retirement. With such games, you can generally access your funds from 55. It is critical to plan for your long-term future; when considering your pension, seek expert advice from a specialist such as Portafina.

Topping up your pension through tax relief.

As you’re probably aware, you pay income tax to the government once you start earning over a certain amount. The amount of income tax you pay should be marked on your payslip.

However, the amount of money you pay from your salary into your pension scheme qualifies for tax relief. This means that money you would not typically have gets invested into your future.

Even if you’re earning under the tax threshold, you may still be able to receive tax relief on pension contributions. This situation applies to certain types of private or stakeholder pensions taken out by yourself and some workplace pensions. However, it does not apply to all workplace pension schemes.

Employer top-up contributions.

To help prepare workers for their retirement, employers are now legally bound to enrol their employees in a workplace pension scheme automatically. This process is known as automatic enrolment.

If you’re part of a workplace pension scheme, you should consider this a significant benefit. Although you can leave the scheme, you should only do this as a last resort. Opting out of a workplace pension is the equivalent of turning down a pay rise or the offer of free money.

Tax-free lump sum on retirement.

Your pension will provide you with a tax-free cash lump sum when you retire. If you have contributed to a defined contribution pension scheme, rather than one related to salary, you can have access to your pension funds from the age of 55.

The amount you can get as a tax-free lump sum is up to 25% of your total pension value. Although this may seem appealing, you should consider the implications of taking too much cash too soon, as this could leave you short of income for the rest of your retirement. A regulated financial advisor can help you navigate the complexities of pensions, ensuring that you make decisions of the most financial benefit to your situation.