What is a pension?
A pension is the money you use to live on when you retire. People have different ways of supporting themselves financially in their retirement (using inheritance money, for example) but a common way is to save money over a long period of time. You could do this simply by putting some money into a savings account each month but with the tax relief you get, a pension plan could be a good option. Your pension pot cannot be accessed before you reach the age of 55, so there’s no temptation to dip into it beforehand!
Why save into a pension?
When you pay money into a pension, you get tax relief. A basic-rate taxpayer gets 20% tax relief on their pension payments, a higher rate payer 40%, and an additional rate payer 45%. So, as a basic-rate taxpayer, for every £80 you pay into a pension, you get an extra £20 from the government, which means £100 is actually being invested for your retirement. If you are a higher or additional rate tax payer, you may be able to claim back more tax relief through your tax return. There are however, limits to the amount you can pay in (especially when it comes to higher and additional rate taxpayers) so it's well worth taking a look at our guide to pension tax for more information.
Your pension fund grows largely tax-free, which can help to boost the amount you have in your pension plan. Remember that, depending on investment performance, the value of your fund can also go down which affects how much you've got in your pension plan and the amount of income you'll have when you retire.
You can currently take up to 25% of your pension savings as a tax free sum. What you do with it is entirely up to you – except for one thing: you can’t put it into another pension plan. Otherwise, you’re free to spend it – or save it – anyway you please.
That leaves 75% or more in your plan which is taxable when you take it, but taking the tax-free sum will reduce the amount available to provide an income in retirement.
Timeline to retirement
It’s never too late to save for retirement. However, you should understand that both the amount you save and the way you invest changes as you get older; assuming you want the same standard of living after you retire.
Ready to start saving?
If you’d like to start saving for your retirement, have a look at our retirement account page to see how we can help.