Understanding the value of a pension

There are many ways of saving for retirement, but the option of saving through a pension scheme remains a firm favourite. There are many reasons for this but two stand out in particular. Firstly, pension saving is very heavily promoted by the government. Arguably the most notable example of this was the introduction of the auto-enrolment scheme, which basically forced employers to enrol employees into a workplace pension scheme unless they actively opted out. Secondly, pension saving can be a very tax-efficient way of saving for the future. Basically, you can make pension contributions out of your pre-tax income in the present and then access the returns in your later years, when you will have ceased to have income from employment (or at least the same level of income from employment).

The basics of pensions and tax Basically, you can potentially save up to £40,000 per year into a pension fund without paying tax on it. There are, however, a couple of details worth noting. First of all, you will only receive tax relief on the contributions made out of your own total taxable income. In other words, if you are lucky enough to have someone else topping up your pensions contributions, you will not receive tax relief on their contributions. There is, however, a slight twist to this in that couples who are in a legally-recognized relationship can have the (higher) earner make pension contributions on behalf of their spouse (or civil partner). At the current time, they can make annual contributions of up to £2,880 on which base-rate tax relief will be applied, giving a total value of £3,600. Secondly, if your total adjustable income is over £150,000 your annual allowance will fall by £1 for every £2 excess income you have. Hence, if your total adjustable income is £230,000 per annum or more, you will lose your entire annual allowance. For the sake of clarity, your total adjustable income is your annual salary, dividends, rental income and savings interest, plus the value of any employer pension contributions. NB: If you are a member of a defined benefits pension scheme then the benefits you accrue each year will be assigned a monetary value which will form a part of your overall personal allowance and hence will reduce the amount you can save in other pension schemes.

Options for pension saving If you are in employment and meet the criteria for auto-enrolment then you will be auto-enrolled into a workplace pension unless you actively choose to opt out of one. Opting out is a serious decision, as it means that you may lose the benefit of the employer’s contributions. It may, however, still be the right option if you are struggling to make ends meet and do not feel confident about making even the minimum level of employee contributions. If this is the case, you may wish to ask your employer if they will pay their contributions into a private pension, although this would be entirely optional. For those in other situations, a personal pension may be an appropriate option. Last but by no means least, you may wish to ensure that you maximize your entitlement to a state pension. This means paying National Insurance contributions, which will happen automatically if you are in employment and meet the relevant criteria but can also be done voluntarily. National Insurance credits can also be accrued if you are in receipt of certain benefits. This fact may be of particular relevance to those fulfilling caring roles, such as home-makers with children as it may make it worthwhile to apply for a benefit for which you qualify, even if you know that your overall household income is too high for you to receive any financial support at this point. For Pension We Act As Introducers Only