What does a good retirement look like for you? This may not be a question we ask ourselves, especially the younger we are. Retirement can feel like a lifetime away and we have other priorities. However, regular pension contributions and for some, one off lump sums, can make a significant difference to the quality of retirement. There can also be substantial tax savings along the way and security for your family. Let’s look at some of the benefits:
Contributions from your employer
Your employer may be required to make contributions to a pension for you in addition to the contributions you make. Some may match your contributions or pay even more. This benefit of regular employer contributions over time can make a significant difference to the overall value of your pension pot in retirement. For those who run their own company making large pension contributions in good profit years can be extremely tax efficient.
Tax relief
The tax relief given on pension contributions can be substantial and enables you to keep more of the money you earn. The way in which the tax relief is given depends on the type of pension scheme you are in, but in basic terms you will receive tax relief at your highest marginal tax rate. For example, if you pay tax at the basic rate (20%) on the majority of your income, but £5,000 of your income falls into the higher rate of 40%, making a personal pension contribution of £5,000 will mean you save tax of £2,000, but have the benefit of £5,000 in your retirement savings pot. If you took this £5,000 as income to save in another way, you would only have £3,000 to save after the deduction of tax.
Child Benefit
Chid Benefit is a valuable benefit to parents, especially with the current rise in living costs. The full value of this benefit is lost where the benefit claimant or their partner earns over £50,000 per year. The higher rate (40%) of tax also kicks in for earnings above £50,270, so not only do you start to pay higher rate tax, but you are also losing Child Benefit. Any pension contributions made personally will reduce your income when calculating your eligibility for Child Benefit. This means that not only do you save tax at 40%, but you get to keep more of your Child Benefit, whilst also saving for retirement.
Investment choice
With the exception of those working in the public sector, most of us will now join a type of personal or group personal pension whereby you build up your own pension pot and in retirement you have choices over how you take income. How this pension grows over time depends on how it is invested. You may be unaware of the choice of investments and making changes to these could make a significant difference to the value of your pension pot in retirement.
Tax free growth
The investments within your pension benefit from tax free growth. In contrast the investment return on investments and savings held outside of a pension can be subject to both Income Tax and Capital Gains Tax.
On your death
Different types of pensions have different rules on who can benefit and what the beneficiaries’ options are. It is very important to check that your death benefit nominations are correct and up to date and to review what your pension scheme offers. In most cases pensions are free from Inheritance Tax, so this can be an additional tax saving for many.
At Churchgates we offer a free initial meeting where we can discuss reviewing any existing pensions you have and can advise on setting up new pensions for both individuals and small businesses.
