Pensions, what’s the big deal?

The last few months have been more than a little crazy, Covid-19 has certainly turned the world on its head.

It has also brought home the message that money planning is really important. It might not be the most glamorous of topics but pension planning is key. We all have goals and ambitions for the future. Perhaps you want to spend your retirement travelling the world or ageing disgracefully and learning to sky dive, who are we to judge!

The earlier you start planning the more freedom you will have to realise your dreams; it really is that simple.

For example, if you relied on the state pension you would only receive around £175.20 per week at retirement age. By making your own contributions early, you can greatly increase this amount.

What exactly is a pension and how do I contribute?

A pension is a pot of cash that you, and your employer, can pay into – Then, at retirement, you can draw money from your pension pot or exchange the cash with an insurance company for a regular income until death, called an annuity. You are now able, from the age of 58, to access your pension pot more flexibly, taking as much or as little cash as you like, whenever you like.

How do I get a pension?

If you are over the age of 22 and earning at least £10,000 a year your employer will automatically enrol you in a pension scheme.

Typically, you sacrifice a small amount of your salary and your employer also contributes the equivalent of at least 3% of your salary, at no cost to you. It is up to you if you wish to pay more in each month, it certainly makes sense if you can afford it, especially if your employer is contributing too. What you need to know is that the sooner you start, the bigger your pot will be when you wish to draw on it.

dancing pensioner, happy

How much should I pay into my pension?

If you dream of a life of luxury or fancy retiring early (let’s face it who doesn’t!) then the sooner you start contributing, the better. It’s sometimes suggested that money equivalent to around 15% of your annual salary should be tucked away into your pension. Not all of this money comes from you. Remember that if you’re paying into a workplace pension, your employer will add contributions to your pension too.

It is better to pay little and often towards your pension as soon as you can.

Is a pension REALLY worth it?

Quite simply, yes!

Moreover, a key bonus of a pension is the tax relief. This means you automatically get a certain percentage back from the Government as an additional deposit into your pension pot. If you are part of a workplace pension, you may not need to reclaim any tax. Your employer simply deducts less tax from your pay packet.

It might seem a way off now but it will pay off in the future to get ahead early.

A blog post by Loretta Mooney

Loretta is a Chartered Financial Planner at Kellands and has conducted financial education workshops in her local area of Cheshire.

For more on the above and other money subjects, check out the Your Money Matters here.