Finance Q&A's
Pension tax relief
A pension is essential when planning for the future, providing income post-retirement. Here, Lakeside technical specialist, Adam Chambers discusses the benefits of such savings.
Why do you need to start saving into a pension?
A: When you come to retire, there is no further earned income, you are basically on your own! There is the state pension, but this is there to meet the minimum basic needs of living. The basic state pension does not usually provide the retirement many people envisage enjoying, it is there to cover bills and basic food needs.
Saving into a pension will help you to enjoy retirement, go on holidays, etc. Having extra money also provides relief when the little things need replacing such as a washing machine; boiler or telly. The basic state pension is currently £134.25 per week for a single person.
Why should you pay into a pension instead of an alternative savings account?
A: A pension is a tax-efficient savings pot designed to provide income when you retire.
When you draw a pension currently 25% of the pension value is tax-free, and the remaining 75% of the pension is taxed at your highest income tax rate. There are numerous ways to take your pension regarding the tax-free lump sum and income.
When you are saving into a pension, the government gives you 20% tax relief, for example, a £200 contribution is ‘grossed up’ to
£250. The compounded benefit of the tax relief outweighs the tax paid when in retirement when saving over a long period of time.
Saving £200 per month for 20 years into a non-pension investment achieving growth of 4% per annum after charges would build a pot value of £57,500 whereas the same investment paid into a pension with the HMRC tax relief being added would grow to £72,000.
When should you set up a pension and how much should you pay in?
A: A small saving each month can make a huge difference in retirement. Auto-Enrolment goes a little way in helping with this, but often is not enough. To double the current basic state pension, you will need a pension pot in the region of £120,000 to £140,000.
This is a saving of around £360 per month plus the tax relief of £90 with average returns of 4% per annum on your investment over 20 years. The younger you start, and the more you save, the more you will enjoy your retirement!
At what age can you access a pension?
A: You are allowed to access a pension ten years before your state retirement age. So, if your state retirement age is 68, you can access your pension at 58, etc.
Please feel free to contact us for further information: admin@lakesidefs.co.uk
