Benefits of Saving in a Scheme
What makes a pension scheme so special? Why should you use this method of saving for your retirement rather than relying on other savings vehicles or simply trusting in the State to provide for you?
Well, there are a number of clear advantages to saving in a pension scheme – and a few of the key ones are explained here.
A More Comfortable Retirement
A comfortable retirement is probably something we all aspire to – but to assume you’ll get there without making appropriate provision ahead of time would be dangerous. Joining your pension scheme can potentially make a massive difference to your income in retirement, especially if you join whilst you are still young, make generous contributions and your investments perform well.
Tax Savings
As your pension scheme is registered with Her Majesty’s Revenue and Customs (HMRC), it benefits from several valuable tax advantages.
For a start, any contributions you make to the scheme are deducted from your salary before income tax, meaning that every £1 you contribute only reduces your take-home pay by 80p if you are a basic rate payer. Any growth experienced by your invested savings is also tax-free.
Furthermore, when you come to retire, you will have the option to take part of your individual pension account as a tax-free cash lump sum, subject to HMRC limits.
Other forms of saving do not benefit from these tax concessions, making your pension scheme a great means of saving for retirement.
Please note, if your earnings are below the starting rate for income tax you will not benefit from the tax relief a taxpayer would receive. However, this doesn’t affect the amount that is paid into your pension and you’ll continue to benefit from the money that your employer pays in.
Compounding and long-term saving
Any investment growth your savings experience is automatically reinvested to attract further growth. This principle is called compounding, and it can be a powerful force in accelerating the growth of your individual pension account.
Compounding means that there are significant advantages to starting your pension saving early in your career and saving for the long term. Because the contributions you make when you are young will have longer to grow, they are often much more valuable than equivalent contributions made closer to your retirement. For instance, an employee contributing £50 a month over a 35-year period could typically expect to have a larger pot of money at retirement than an employee contributing £150 a month over a 20-year period. Even though less money is contributed in total, the effect of compounding over the longer savings period is powerful enough to generate a larger end result.
Flexibility
Your pension scheme gives you a number of investment options, meaning that, whether you like to take more risks in investment or prefer a more conservative approach, there are funds to suit you. You can read more about the principles of investment and the specific funds available to you in the member booklets.