The wonder of pensions…no really
If you google the meaning of a pension you get variations of the following:
‘A pension is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments.’
In simple terms, a pension scheme is just a type of savings plan to help you save money for later life however, the way in which these plans work, and the built-in tax benefits means they are not to be ignored or dismissed.
How many times have you thought about your pensions held ‘somewhere’ with a provider whose name you can’t remember holding an amount of your money that you haven’t looked at in years? If you had the same amount of money in a bank account that you could readily access, it’s likely that you may be a little more up to date with the details.
Pensions, as savings products, are really a wonderful thing. For every pound you pay in, Her Majesty’s Revenue and Customs will only take 80p from you and will give you 20p for free – without many demands. You don’t have to be employed or earning anything at all, you don’t have to pay in a minimum amount, and you don’t need to claim the extra contribution from HMRC, it’s automatic. Yes, you need to wait until you’re 55 to access your money and yes, you may pay some tax on the income you draw out but whilst invested, none of the growth your savings show is subject to tax.
Another popular feeling is that it’s too late to contribute to pensions. No matter how old you are, does claiming an extra 20% on your savings from HMRC sound like a bad idea? Perhaps not. By the time it feels ‘too late’ most people have accumulated pots with various providers, through employment or periods of time when it seemed a good time to save into a pension. This usually leaves a situation where you want to start looking at what your income will look like if you reduce working hours or stop working completely and it can be a daunting task trying to make sense of it all.
The other consideration is what these older style plans will actually let you do with your money when you want to get your hands on it. In 2015 the government made huge changes to the pension regime, providing you with a great deal more flexibility in how to access your money held in pensions. In theory, the prospect of receiving tens of thousands of pounds in a single lump sum could be very tempting indeed but at this point in your life, being a little more careful may be wise. Remember, this money, along with your State Pension and other assets needs to support your years not working so that you can enjoy yourself.
Gone are the days where your pension was a boring topic of conversation, when they were just something you had at work, that you paid very little attention to. Today, pensions are a great way to save in a tax efficient way for just about everyone, to make sure the money you save is there for you to access in the way you want to, when you want it.