Let’s talk about pensions! I know, it’s not the most exciting topic in the world, but hear me out. Did you know that the majority of adults in the UK don’t have enough saved up to support the lifestyle they want in retirement? Scary, right? According to Royal London, a whopping 50% of workers feel like they’re not prepared for retirement. It’s tough to know how much you should be saving, and even tougher to find the extra cash to contribute. However, I’ve got some great reasons why you should start putting a little away each month to beat the average UK pension pot.
But I’ll get my state pension when I retire.
Did you know that many people overestimate the amount of state pension they will receive? They assume it will be enough to live on. The truth is, for 2023/24, the state pension is only £203.85 per week, which works out to be around £10,600 per year.
It’s important to keep in mind that if you’ve taken a break from work and not contributed to national insurance during a tax year, your state pension may be reduced. So, it’s always better to plan ahead and make sure you have enough savings to support your retirement and not fall into the trap of having a below average UK pension pot.
Reason 1: You get tax relief on contributions.
A pension is a savings plan that is designed for long-term investment. It comes with the benefit of tax relief. This means that instead of paying tax on your income, the tax amount is contributed to your pension. This can be especially useful if you increase your pension contributions to move out of higher tax brackets. This will be sure to help you build a better than average UK pension pot.
Reason 2: Your employer contributes to your pension
The government has recently realised that the number of people saving for their pension is at an all-time low. This is partly due to the decline of the defined benefit pension, also known as the final salary pension, since the turn of the millennium.
To help people save for their pension, the government introduced ‘auto-enrolment’ in late 2015. Auto-enrolment has now been rolled out to all employers, big and small, over several years. The good news is that auto-enrolment requires your employer to make contributions towards your pension. The bad news is that you’ll also be required to contribute to the pension. However, it’s important not to turn down your employer’s contribution. It’s essentially free money and can be considered a pay rise.
Reason 3: Flexibility and a tax-free lump sum on retirement
You can usually start taking your pension at the age of 55, depending on the rules of your pension pot. The government might decide to increase the age limit, which means we might have to work longer before we can get our pension. But let’s stay hopeful that we can save enough, retire early, and enjoy our pension at 55. When you retire, you can take out 25% of your pension pot as a tax-free lump sum.
With changes to UK pension pot regulations, there’s now greater flexibility in how and when you can access your pension. After the age of 55, you have various options on how to use your pension savings. This includes taking a lump sum, buying an annuity, or drawing down income over time. This flexibility allows you to plan a retirement strategy that best suits your needs and lifestyle.
Reason 4: The Power of Compound Growth
With compound interest, your pension contributions not only earn interest, but that interest also accumulates further interest, leading to exponential growth over time. But here’s the secret to maximising this effect – start early! The earlier you start investing, the more time your contributions have to compound and grow, resulting in a significant increase in your retirement savings.
Plus, the reinvestment of dividends and bond interest also contributes to the compounding process, supercharging your growth even further. And the best part? Compound interest can help mitigate the impact of market fluctuations, ensuring steady growth over the long term. So, whether you can only spare a small contribution or you’re able to invest more, the power of compound interest means that each pound you save today multiplies over time, building a more solid financial foundation for your retirement years.
Reason 5: Protected from Creditors
One of the most reassuring benefits of saving into a UK pension is the protection it offers against creditors. If you ever face financial difficulties or bankruptcy, your pension savings are generally secure. This means that you don’t have to worry about losing your hard-earned retirement funds to creditors, as UK law typically excludes pension pots from being claimed during bankruptcy proceedings.
This legal safety net helps to ensure that your retirement funds remain intact, providing long-term financial security. Knowing that your pension is protected can give you the confidence and peace of mind to save consistently, as it represents a stable and secure foundation for your future, unaffected by potential financial upheavals. Of course, it’s worth noting that there are rare exceptions, particularly in cases of deliberate misuse of the pension system. However, overall, this protection offers a significant boost to your retirement planning process, allowing you to focus on your goals and enjoy a happier, more stable future.