Benefits to saving for a pension
People often say, “I am too young to think about pension saving”, but the younger you are when you start to save for your pension, the better you will be, financially when you retire.
When you retire, your pension will in effect, become your ‘salary’ or income, so targeting how much you want to receive when you retire is very important, as you will still have out-goings to pay such as heating and food bills; rental or mortgage payments and general up keep of your home, before you even think of enjoying your retirement with the holidays that you hope to plan and take.
Why are pensions important?
Providing you have paid the minimum National Insurance requirements, you will receive a State Pension, and the maximum State Pension is a lot less than the amount most people say they hope to retire on. For 2022/23, it’s £185.15 a week – or £9,628 a year. For further information visit the government website.
Many people are not saving nearly enough to give them the standard of living they hope for when they retire, and as a result they may have to consider:
- retiring later
- start saving more
- lower their expectations of what they will be able to afford in retirement.
To help and encourage people to save, the government introduced the ‘Auto-enrolment’ legislation where all employers have to enrol their employees into a workplace pension scheme. Further information on Auto-enrolment can be found on the government website.
What are the advantages of saving into a pension?
The main advantage to pension saving besides providing an ‘income’ in retirement, is the tax relief you receive on those contributions. Any pension contributions that you pay are deducted from your salary before your tax is calculated, thereby reducing the tax that you pay.
A pension can be looked upon as a long-term savings plan with tax relief. Receiving tax relief on pensions means some of your money that would have gone to the government as tax, goes into your pension instead.
There are 2 main types of pension schemes:
- Defined Benefit (DB), often referred to as Final Salary Schemes or Career Average Schemes. Under these schemes you earn an actual pension benefit amount based on your earnings. or
- Defined Contribution (DC) schemes. Under these schemes, the contributions that you or your employer pays into the scheme, goes towards your pot of money, or fund, which grows throughout your working life based on your investment choices. At retirement that fund will then provide you with either an income in retirement or draw-down options.
Depending upon your salary, grade or post, the University offers a number of pension schemes for its employees and further information can be found within the relevant sections.
You do not have to join a pension scheme if you do not want to, and schemes do offer an ‘Opt-out’ option, as well as a ‘Re-joining’ option. There are of course many options in order to save for your retirement and you may feel that a pension scheme saving may not be for you. When planning for retirement, it is suggested that you take Independent Financial advice in order that you right pension saving options for your circumstances.