Retirement Planning
Pensions might seem complicated but the basic idea is a simple one. It's worth understanding their benefits, because your State Pension - while providing a foundation - may not be enough to live on. You need to save more.
More than half of people in the UK either aren't saving at all for their retirement or they aren't saving nearly enough to give them the standard of living they hope for when they retire.
If you fall into this category, you have three choices. You can:
- Adjust your expectations of what you'll be able to afford in retirement
- Start saving more
- Retire later
Don't rely on the State Pension to keep you going in retirement. The maximum State Pension of £175.20 (tax year 2020/21) a week, that is £9110.40 per year, is far below what most people say they hope to retire on.
Pension plans have a number of important advantages that will make your savings grow more rapidly than might otherwise be the case.
A pension is basically a long-term savings plan with tax relief - your contributions are invested so that they grow throughout your career and then provide you with an income in retirement. Generally, you can access the money in your pension pot from the age of 55.
- You can pay up to 100% of you earnings into a pension (maximum of £40,000*)
- If you earn less than £3,600 per year you can still contribute up to £3,600 regardless of income
- The maximum lifetime allowance is currently £1,073,100**
- You can contribute on behalf of your children up to £3,600** gross per year
- Tax Relief Examples
If a non or basic rate (20%) tax payer pays £100 into a personal pension - £125 will be invested
If a higher rate (40%) tax payer pays £100 into a personal pension - £125 will be invested, but they will be able to claim an additional 20% tax relief via self assessment giving a 'true' cost of £75 If an additional (45%) rate tax payer pays £100 into a personal pension - £125 will be invested, but they will be able to claim an additional 25% tax relief via self assessment meaning a 'true' cost of £68.75** Tax Information given is based on the 2020/21 tax year, and may be subject to change in the future. Any contributions in excess of you annual allowances will be taxed at your marginal rate.
* In some cases contributions may be restricted further. As an example £4,000 per year where an individual has taken monies from their pension and or where an individual has an income in excess of £200,000 per year.
THE VALUE OF A PENSION IS NOT GUARANTEED AND CAN GO UP AND DOWN DEPENDING ON INVESTMENT PERFORMANCE. YOU COULD GET BACK LESS THAN YOU'VE PAID IN.
