Many people are living on less and that includes the older generation. It may not seem important to save for later years when living day-to-day is a struggle. However, saving into a pension is a smart move because putting money away now provides it with time to grow. When you exit the workforce, there will be money available to sustain a comfortable lifestyle. Making small financial sacrifices today will yield big benefits in the future.
A pension is an efficient retirement savings technique. Contributions are topped up by the taxman and in many cases, by the employer. Unfortunately, more than half of UK residents are not saving for retirement or are not saving enough money to provide the desired standard of living during retirement. The State Pension will not usually provide enough money to live on so saving into a private pension is also recommended.
The maximum basic State Pension is £107.45 per week, which is much less than what most people plan to live on during retirement. A private pension provides supplemental income beginning at age 55. Regular contributions are invested and topped up by the taxman. The amount that would be deemed income tax is added to the pension fund. Even if income is not high enough to pay tax, pension contributions may benefit from tax relief.
Many employers have long made contributions to worker pensions and as of October 2012, this practice is phasing in as compulsory. If an employer offers participation in a pension that includes employer contributions, participate because this is like getting free money. Some employers will even make pension contributions regardless of whether the employee pays into the account so even financial circumstances should not prevent joining.
Upon retirement, pension participants may take up to one-quarter of their savings as a lump sum tax-free. The remainder of savings is allocated as taxable income. Money Advice Service and other independent agencies provide online tools for estimating how much should be saved each month to generate a desired income. The most generous pension schemes generate income that equals two-thirds of salary.
The sooner you start a pension, the better, because it will cost less to achieve the desired standard of living during retirement. Saving even a small amount now is better than saving nothing. The State Pension will only support the basics during retirement and contributing to an individual pension provides tax relief and maybe even employer contributions.