Are pensions worth it?

Lots of people are asking things like ‘Should I have a pension?’ and ‘Which is better – pension or savings account?’ You may be one of these people.

We think pensions are great and everybody should have one. Here are some reasons why.

Workplace pension? Your employer pays in too

If you’re in a workplace pension, you pay money into it – and your employer does too. As well as paying you for your work, they pay money into your pension savings. It’s like they’re paying you twice.

The amount your employer puts in depends on them. There is a minimum level set by the government, where you pay 5% of your salary between £6,420 and £50,000, and your employer adds another 3%. That means an amount equal to 8% of your salary is going into your pension savings, and you only pay 5% of it.

Of course, lots of employers pay more than this. Some have ‘matching’ contributions where they put in more if you put in more, up to a limit. It’s worth checking whether you’re getting the maximum

Pension tax relief explained

Did you know you don’t pay income tax on pension contributions? It’s one of the best things about pension saving. The government adds some of the tax you would have paid to your pension savings instead.

This is known as ‘tax relief’. How does pension tax relief work? What usually happens is your pension payments come out of your salary before tax – so some of the tax you would have paid goes into your pension savings instead.

As a very rough guide, if you’re a basic-rate taxpayer and you put £80 into your pension, the government adds around another £20 – so around £100 actually goes into your pension. When else does the government give you £20?
If you’re a higher-rate taxpayer it’s even more, although you have to claim it through your self-assessment tax return.

Salary sacrifice? You’ll save on National Insurance too

Some employers offer ‘salary sacrifice’ as a way to pay pension contributions and save National Insurance. You may also find it called ‘salary exchange’ or ‘Smart Pension’.

How does salary sacrifice work?

• You agree with your employer that you’ll give up an amount of your salary equal to your pension contributions.
• Your employer pays that amount into your pension savings, together with their contributions.
• You don’t pay any National Insurance on the salary that goes into your pension savings – so you actually get a bit more money in your pay packet.
• Your employer also saves National insurance – so they benefit too.
  If you’re not sure if you’re paying through salary sacrifice, ask your employer, as some have it set up automatically.

Are there any other tax advantages of pensions?

There certainly are.

When you start taking your retirement income, you can usually take up to a quarter of the money in your pension savings without paying any tax on it at all (although this does mean you’ll have less left for your retirement income).

And there are advantages for inheritance tax. Pension savings don’t count towards inheritance tax until you start to take money out of them.

Even if you had started taking money out of your pension savings, your dependants can inherit up to £325,000 from you, or £650,000 if you’re a couple, without having to pay inheritance tax on the money.

Compounding makes your pension better

You may think of ‘compounding’ as a bad thing – as in ‘compounding a felony’, meaning making an offence worse. But compounding, or compound interest, can make your pension better by helping your savings build up faster.

Here’s how it works.

You (and your employer, if it’s a workplace pension) pay into your pension savings. You earn interest, or investment returns, on this money. Then, you pay more in to build up more savings.

You earn interest or investment returns on:

• the new savings
• the old savings, and
• the interest or investment returns you earned on the old savings.
  Can you see how this helps you build up more savings? Compounding is brilliant.

What if you’re self-employed?

It’s still worth paying into a pension. Even if you’re not getting employer contributions, you still benefit from compound interest to build up your pension savings, and you get tax relief on your pension contributions. You have to claim your tax relief as part of your self-assessment tax return.

If your business is a limited company, you may even be able to pay employer pension contributions from your business.

Is it better to save or pay into a pension?

Of course, a pension isn’t the only way to save. There are other ways, including bank and building society accounts – especially ‘high interest’ ones – and ISAs. ISAs are popular because you don’t pay any tax once your money’s inside one.

Let’s think about the disadvantages of pensions for a minute.

The downside of pensions

You can’t start taking money out of your pension savings until you’re at least 55, and this is expected to go up to 57 in 2028.

Having said this, some people think it’s good that you can’t dip into your pension money while it’s building up. You can dip into other kinds of savings, including ISAs. So, a good solution might be to have pension savings and other savings like an ISA.

It’s complicated

Pensions have a reputation for being complicated. It’s true some kinds of pension – such as older workplace pension schemes – have complicated rules, while more modern pension schemes have scary things like investment choices.

When you want to retire, it can be even more complicated. Different kinds of pension schemes have different rules about how and when you can get money out of them. The ‘pension freedoms’ offer you choices at retirement – but how do you choose?

Fortunately, we can help with all this.

Can we help you?

Baffled about pensions? Not sure what the best thing is to do? Ask us for help. We love helping people get the best out of their money.

Here are a few of the reasons you might want to give us a go.

• The personal touch. We go out of our way to understand you, your life situation, and what you want.
• We really know our stuff. We’ve got over 50 years’ experience of helping people plan and achieve the retirement they want.
• We’re completely independent and unbiased. 
• Your first consultation is on us.

We can help you plan the retirement you want, so you can get on with enjoying life without having to worry about money – now or in the future.