Understanding Pensions: Why Saving for Retirement is More Important Than Ever

Pensions are a cornerstone of financial planning, designed to help you build a substantial pot of money to support your desired lifestyle in retirement. But why should you prioritise saving into a pension, and why start now?

Key Features and Benefits of Pensions:

• Tax-Free Growth: One of the most significant advantages is that your pension funds can grow tax-free while held within the pension wrapper. This means you typically pay no Capital Gains Tax (CGT) or income tax on investment growth within your pension.

• Tax-Efficient Saving: Pensions offer a highly tax-efficient way to save throughout your working life. This is achieved either through tax relief on contributions or by utilising salary sacrifice arrangements.

• Flexible Access: From age 55 (rising to 57 from 2028), you can access your pension flexibly. Options range from purchasing an annuity (a guaranteed income for life) right through to flexible access drawdown, allowing you to take an income directly from your pot.

The Power of Starting Early:

Saving into a pension sooner rather than later can make a dramatic difference to your retirement pot.

• Based on a £100 per month net contribution (with 20% tax relief and 5% annual growth), starting now could result in a pot of £75,170 after 25 years.

• However, if you delay starting your pension saving by just 5 years, that same £100 per month contribution over 20 years (total of 25 years from the initial start point) would only accumulate £52,079.

This significant difference highlights the power of compound growth and the benefits of maximising your time in the market.

Important Consideration: A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

Therefore, professional advice is always recommended to align your savings strategy with your risk tolerance and financial goals.