We talk about saving towards our pension, but we are actually doing something rather more exciting.
Savings stay as cash. They will earn interest, but they do so distressingly slowly when interest rates are low.
When we pay into our pensions, we are actually investing. Our money does not stay as cash, but is used to buy investments, often in the form of stocks and shares.
This can sound scary. As we all know, the value of investments can fall as well as rise. But the chances are that your pension will be the best investment you will ever make – for five very good reasons.
Reason 1. The taxman is on your side
When you pay into a pension, the taxman pays in too. This is because the government wants to encourage you to save for your future, and the encouragement takes the practical form of tax relief.
Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So:
- Basic-rate taxpayers get 20% tax relief
- Higher-rate taxpayers can claim 40% tax relief
- Additional-rate taxpayers can claim 45% tax relief
In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way.
Tax relief sounds complicated. But what it actually means is that a basic rate taxpayer only has to pay £80 to pay £100 into their pension. It’s even better for higher-rate (40%) and additional-rate (45%) taxpayers. Putting £100 into your pension costs £60 and £55 respectively.
Your pension is designed to multiply your money as soon as you put it in.
Reason 2. You can get professional investment oversight
The money you and the taxman pay into your pension is invested for you. Of course, investment can be complicated. There are many different ways to invest, and tens of thousands of businesses to invest in. Knowing the best way to invest for the growth you need can be difficult, unless you are an investment expert.
If you are, a pension such as a Self-Invested Personal Pension or SIPP can let you make all the investment decisions. If you are not, you can simply leave the decisions to the fund manager of your pension provider. They can make the decisions for you, or provide a choice of funds to invest in, all carefully managed in your behalf.
Your pension pot is monitored, managed and safeguarded for you.
Reason 3. You get compound interest working for you
A pension you start in your 20s could have 40 years or so to build in value. With years of potential investment growth and with compound interest – which means the money your contributions earn is reinvested to earn for you – your pension pot could grow to be many times the amount you put in.
Your money should earn money, and that money will be reinvested to earn money – this is compound interest, and the longer it goes on working for you, the more exciting the results can be.
Reason 4. Your pension pot can go on growing after you retire
It used to be that your pension pot could only be used to buy an annuity. This means that you would hand it over to a pension provider, who in return would give you a regular payment for the rest of your life. This could still be the way you use your pension pot, but these days you have a choice. By leaving your pension pot invested, and only drawing down the income you need month by month, your pot can have the potential for continued growth.
Pension pots can have an investment that goes on working for you even after you retire.
Reason 5. You can get professional help
Getting expert help with any investment is a wise move, and your pension is no different. Knowing how to build your pension pot, which providers to consider and developing a strategy to maximise your income can all be easier with an expert at your side. Fortunately, it is easy to get all the help you need, simply by making a call to us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
A pension is a long-term investment, the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Pension savings are at risk of being eroded by inflation.
When investing, your capital is at risk.The Financial Conduct Authority does not regulate taxation advice.
