When I was at school, I could have done with being taught about pensions, instead of algebra! I have always been a money saver, but have kept it in an ISA. Putting money into a pension at 18 when I got my first proper job was something I knew nothing about. Back then it wasn’t necessary for your employer to contribute to a pension for you. It was only when I turned 25 that I had a letter through the post saying they were going to contribute to a pension for me. Now in my late 30s, I think of those wasted years that I could have popped some money each month into a pension.
But pensions are a huge minefield. There are many complicated terms like an annuity, defined benefit, defined contribution, and freedom pensions as well as the risks involved that make it very hard to understand.
At the start of the year when I was thinking about leaving my employed part-time job to go full-time self-employed I did some research on pensions, and why we all should have one.
The Advantages of a Pension
- Guaranteed Income – When you come to retire, you will have a guaranteed income. This is what we would all like. Not to worry about bills, buying food and other living expenses. At the moment there is a state pension, but it’s basic and not enough to live off comfortably. Plus you need to make sure you have at least 10 qualifying years on your National Insurance record to get any State Pension.
- Tax Relief – You can enjoy tax relief on your contributions. If you are employed, your employer will take your contribution before you pay tax on it. So you only pay tax on the remainder of your salary. If you pay into a private pension then you pay tax on your income and your pension provider then claims the tax back from the government for your contribution. So if you pay the basic tax rate of 20% and pay in £80 you will get £100 into your pension pot.
- Compound Interest – The earlier you start saving for your pension the better as your compound interest will grow each year. So after the first year, you will make a return on your pension pot. The second-year you will make a return on your original investment plus the first year return and so on each year.
- Employer Contributions – Your employer may possibly match your contributions up to a certain amount. Therefore building your pot more quickly.
Of course, there are alternatives to setting up a pension. So long as you have form of guaranteed income it can be from a property investment portfolio. Buy-to-let is very popular in this instance.
Whatever you decide to do, it is well worth putting time and effort into researching your options.
Thank you for stopping by today. I hope you have found this post useful in some way.
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