Do You Understand Pensions?
It might even be interesting.
A pension is simply a tax free way to save money for later life. You, your employer and / or the government pay a sum into the pot every month.
That money is deducted from your salary, so although you’ll be earning less now, you’ll have more money than you started with later, when you might need it more. When you retire you can either cash it all in or take it as a monthly income (called an annuity) for the rest of your days.
What does “tax-free” mean?
- There is a “tax relief” associated with your pension savings.
- The Government is encouraging us to save more money into our pensions so they “boost” our pensions savings.
- When you pay money into your pension, the Government will also contribute to your pot and deposit an additional 20%. So, when you earn £100 salary, and are a basic rate tax payer, you pay £20 taxes. When you save £80 into your pension, the Government deposits back this £20 ie. you get the full £100 saved.
- This tax effect is even stronger when you are a higher tax payer: to get to the same £100, you can actually save less if you are a higher rate tax payer (£60) or a top rate tax payer (£45).
How do I save into a pension?
- Workplace pension: All employers will be legally required to provide pension schemes as of April 2017. One of the perks of a workplace pension is that your employer will generally match your contributions (you save £80, they deposit £80).
- Personal pension: This is independent of the contributor’s employer, i.e - you can have the personal pension in addition to, or instead of, the workplace pension. The personal pension is an individual contract between you and the pension provider; you choose the provider and determine the contributions. You may want to consider this option if you are self-employed, or if your workplace pension isn’t sufficient. There are two types of personal pensions: stakeholder pensions or self-invested personal pensions (SIPP).
- State pension: Once you reach pensionable age, which is currently 60 but is expected to rise to 67 by 2028, the government will give you regular pension payments. You are eligible for the state pension if you have paid National Insurance contributions throughout your working life. See below for more specifics.
Photo by Rodion Kutsaev on Unsplash.