Starting Out
The most important thing is to make sure that you do. Start out, that is.
The earlier you start, the more you will probably have at the end. However, it is important to maintain a sense of balance. If you are in your early twenties, earning a small wage and trying to scrape by, it might not make sense to put a huge slice of your earnings into a pension. But if you can afford to start saving, you should.
Pensions are much more flexible than they used to be and most pensions now allow you to stop contributing, or to take payment breaks whenever you need without any penalties, So you are not necessarily tying yourself in to a contract forever.
Don't put off starting a pension. If you are unsure about having retirement pension capital, you can arrange to pay a modest amount by direct debit from your current account shortly after payday it can be a painless way to prepare for the future. But remember to increase your contributions whenever you can afford to - for example, if you get a pay rise.
The Good Old Taxman
No seriously ! You get tax relief on most of the contributions you make to company and private pensions. This means that any contributions you make will effectively be topped up with extra money from Her Majesty’s Revenue and Customs (HMRC), a valuable concession. The higher your tax rate, the more valuable this tax relief will be. A basic rate taxpayer has to find just £80 to see £100 go into their pension, after the Revenue's top-up (that’s 25% “instant” growth). A higher rate taxpayer would only need to find £60 of their own money to see £100 eventually go into their pension (that’s a pretty amazing 66% growth).
As a basic rate taxpayer you get the relief automatically. It is slightly more complex for higher rate taxpayers, however. The basic rate tax relief is added automatically, but you have to reclaim the difference between basic and higher rate tax when you fill in a self-assessment tax return.
Pensions are one of the very few ways to save where HMRC adds a contribution to help your fund grow faster. There are often rumours that tax relief on pensions may one day be removed, especially for higher rate payers (those earning over £130,000 p.a. already have some limits placed on their contribution entitlements). But ask yourself why they offer this valuable concession ? Clearly they want people to provide for themselves on old age, because the cost of the state providing an adequate benefit is going to be prohibitive.
There are limits to how much money you can put into a pension because the Government doesn't want to give away too much in tax relief on contributions, although the limits will rarely affect most savers.
The maximum amount you can contribute to a personal or stakeholder pension is equal to 100% of your earnings, assuming they do not exceed the annual allowance. This has been set at £50,000 per annum (although you can use previous years; allowances in some circumstances). Contributions in excess of the annual allowance will be subject to a tax charge which effectively claws back the marginal tax relief applied to the contribution.
If you do not have any earnings, you can still pay up to £2,880 a year into a pension plan. With tax relief added by the Revenue, this becomes £3,600. It is possible for parents or grand parents to make such contributions on behalf of children and/or grandchildren.
If you can afford to contribute up to the annual allowance, funding a decent level of income in retirement is unlikely to be a major problem. For the rest of us the important thing is to get started.
Tax treatment of relief depends on the individual circumstances of each client and may be subject to change in the future. Levels of, bases of, and reliefs from, taxation are those currently applying and are subject to change.
