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Why save into a pension?

It’s easy to forget your own financial needs when you’re busy running a household. 

Planning ahead can ensure you’ll have an income when your children leave home. It can seem like a long way off, but putting money away for the future is an important part of helping to maintain the standard of living when you decide to work less. View our retirement pages for those who are planning ahead or at the ready to retire life stage.

Can I rely on a State Pension?

While the State Pension provides a foundation to start from, currently £175.20 per week for 2020-21, this is far below what most people hope to retire on.

If your State Pension isn’t enough, you have three choices. You can:

  • retire later
  • start saving more
  • adjust your expectations of what you can afford in retirement.

What type of pension do I have?

There are three main types of pension:

1. State Pension

Most people are eligible for a State Pension. It’s paid by the government and is a secure income for life which increases by at least the rate of inflation each year. Find out more about your State Pension entitlement.

You build up your entitlement to the State Pension by making National Insurance contributions during your working life.

In some cases, you can do this even when you’re not working, such as when you’re bringing up children or claiming certain benefits.

2. Defined contribution pension

Defined contribution pensions include workplace, personal and stakeholder pension schemes.

With this type, you build up a pension pot which you can draw a retirement income from.

The amount varies depending on:

  • the level of charges you pay
  • how well your investment performs, and
  • how much you and your employer (if you are employed) pay into the scheme.

3. Defined benefit pension

A defined benefit salary-based pension usually pays out an income for life and increases yearly.

The amount you get is usually based on how long you’ve been a part of the scheme and how much you earn.

The advantages of saving into a pension

Pensions have a number of important advantages that will make your savings grow:

  • A pension is a long-term savings plan with tax relief.
  • Your regular contributions are invested to grow throughout your career and then provide retirement income.
  • You can usually access the money in your pension pot from the age of 55.

How tax relief tops up your pension pot

When your income is over a certain level, the government takes tax from your earnings. You can see this on your payslip.

However, if you put money into a personal pension scheme, it qualifies for tax relief. This means a portion of your income you’d have paid in tax goes into your pension instead.

The government will still put tax relief into your pension pot, even if your income is too low to pay tax.

Top-ups from employers

To help people save more for retirement, employers must enrol workers into a workplace pension scheme. This is ‘automatic enrolment’.

If your work gives you access to a pension, your employer will pay in too. Unless you can’t afford to contribute or your priority is dealing with debt, staying out is like turning down the offer of a pay rise.

Of course, if your employer contributes to your pension regardless of whether you pay into it, you should join the scheme whatever your financial circumstances.

Find out more about planning your future finances.

 

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