What are the benefits of saving into a pension scheme?

You hear people raving about the benefits of saving into a pension all of the time, don’t you?

Have you ever stopped to think about what exactly the benefits ARE?

And whether making pension contributions are right for YOU right now?

Here are some key features which may help you decide:

Tax Benefits

There is a Pensions annual allowance which is the maximum amount that can be paid into a pension each tax year. This Includes contributions from yourself, your employer, any third party as well as tax relief paid to the pension. The current annual allowance is £60,000. However, you'll only personally get tax relief on contributions up to 100% of your earnings if your earnings are less than the £60,000 annual allowance.

Funds invested in a pension wrapper grow in a tax-effi cient environment 25% of your pension fund* can be taken tax free at your minimum retirement age. Currently, the age of 55 is the minimum retirement age HOWEVER that is increasing to 57 from 6th April, 2028.

In the event you have the funds to be able to invest MORE than the annual allowance in one financial year, any unused annual allowances from the previous 3 years could be carried forward if the current year’s allowance has already been used.

*This amount is usually limited to the lump sum allowance of £268,275

Employer Contributions

Whereas an individual can only contribute a maximum of £60,000 OR 100% of their relevant UK earnings into a pension scheme, there is NO limit to the contribution an employer/company can make into an employee’s pension scheme. The employer/company will only be able to obtain their tax relief on the contribution if the contribution is deemed to be “wholly and exclusively” for the purposes of the business. The contribution should be at a reasonable level.

Potential for Growth

Pension schemes receive the benefit of tax relief and with the possibility of employer contributions plus long term investments, they have the potential to achieve significant growth, in conjunction with compound interest.

Accessing your Pension Funds

We’ve already mentioned that up to 25% of your pension fund could be taken tax free at your minimum retirement age (no matter what your level of income at that time).

Historically, pension funds have been used to buy an annuity which provides you with a guaranteed level of income for the remainder of your life.

You now also have the option of 'Drawdown' which is a more flexible way of accessing your money, as and when you need it. You may not need the same amount of income from your pension fund every year.

For example, if you’re implementing a “phased retirement” whereby you reduce your hours at work, your earned income is likely to reduce so you probably won’t need to take as much (if any) money from your pension fund as you would if you’re not receiving any earned income.

If you don’t cash in the whole of your pension fund to buy an annuity, you can take smaller amounts but leave the remainder invested meaning it still has the opportunity to grow.

There are advantages and disadvantages of each method depending on your own individual circumstances so it is very important to take financial advice. You can also access pensions guidance from the Pension Wise website, or you can book an appointment with them over the telephone 0800 011397.

If you have any questions or need any further information, please get in touch. We offer a no-obligation initial consultation so why not arrange for us to have a chat and discuss your pension plans?

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at anytime. The value of any tax relief generally depends on individual circumstances.

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