As lockdown eases and summer approaches, many of us are feeling brighter about life and taking stock of the positives. To help you get started on counting your blessings, here are seven reasons to be upbeat about your financial future and some ideas that could make it better still.
With a pension plan, you already have cause to feel positive about your future. You’re putting money into a vehicle that’s tax efficient and has long-term potential for growth. Remember that the next time someone tells you pensions are boring.
Another reason to be positive is that you’re not doing it alone – others may be contributing to your pension plan too.
Firstly, there are the tax benefits you get on your contributions. For every £100 you save into your pension plan, it only costs you £80 if you pay the basic rate of income tax. If you’re a higher or additional rate taxpayer you can normally claim further tax relief. This is usually done by contacting the government who can advise you on your personal circumstances. The way tax benefits are given depends on the type of pension scheme you’re in and how you make payments – you can find out more in our Pension basics guide or by speaking to your provider or employer.
If you have a workplace pension, your employer may also top up your contributions or offer salary sacrifice. And in some cases, employers might offer matching schemes. So the more you pay, the more they pay too.
Following the introduction of ‘auto-enrolment’, over 10 million people in the UK have now joined their workplace pension. That’s over 10 million people benefiting from employer contributions worth at least 3% of their qualifying earnings. Keep in mind that the total minimum payment is now 8%. Meaning if your employer pays 3%, you’ll have to pay 5% to make up the difference.
One saver who feels positive about this is Jennifer McLachlan, an external relations manager in her 30s. “I’m auto-enrolled in my employer’s pension scheme, and I know the employer contributions to my plan will really boost my pension pot over time. People sometimes overlook the non-salary benefits they get in their job, but a good pension scheme is really valuable.”
Laws and tax rules may change in the future, and your own circumstances and where you live in the UK will have an impact on tax treatment.
If you hit your pension annual allowance in the last tax year, April is an opportunity to start contributing again. This is because annual contributions to pensions are capped at £40,000, or as much as you earn annually (whichever is lower), and can be lower for very high earners or those already taking money from their pension pots.
Other new allowances arriving each April include those for tax-efficient investments such as individual savings accounts (ISAs).
You don’t have to wait for a new tax year to get to work on your pension, as Alisdair McIntosh, a consultant in his 50s, explains. “Towards the end of each tax year, I review my finances and cash savings, and if I can put an additional lump sum into my personal pension, I do so. To me, it seems like common sense. The tax relief I receive feels like an immediate gain on my investment, and that’s more attractive than ever when interest rates on savings are so low.”
Alisdair also checks his pension regularly and uses an online pension calculator to see if he’s on track for his retirement goals. As a pension plan is an investment, its value can go down as well as up, and could be worth less than what was paid in.
It’s also worthwhile doing some homework on the details of your pension:
Not just for your own future finances, but for society and the planet. Many providers, including Standard Life, recognise the importance of investing sustainably and responsibly, and integrate environmental, social and governance (ESG) factors and choices into their pension fund ranges.
Caroline de Rouffignac, a project manager in her 30s, intends to look into responsible investment options this year. “I want to know that my pension savings are being invested in line with my values. Pension planning is all about the future, after all, and I want to think about the future of the world as well as my own future. It’s good to hear that more pension providers are incorporating responsible investing principles.”
With interest rates so low, even ‘best buy’ cash ISAs tend to pay less than 0.5% interest. Yet the rate of inflation is already higher than this and could rise further as we emerge from lockdown.
So when it comes to potentially growing the value of your money over time and competing with inflation, putting money into a pension plan or other investments, rather than cash savings, can have real attractions.
However, you’ll need to be comfortable with taking some risk as the value of investments can go down as well as up and you might get back less than was paid in. Savings accounts on the other hand aren’t exposed to investment risk, so your money is generally secure in a bank account or cash ISA.
Most people find using a combination of the two can help them reach their financial goals.
Not all of these reasons may apply to you, but there are certainly some simple things you can do to bring more positives to your pension plan:
If you’re worried or unsure about anything, consider getting professional advice. It’s likely to involve a cost but could give you peace of mind when planning your future.
* Financial Conduct Authority, Financial Lives 2020 Survey, February 2021.
The information here is based on our understanding in May 2021 and shouldn’t be regarded as financial advice.
Tax and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.
The value of investments can go down as well as up and may be worth less than what was paid in.