What's so good about a pension? 7 things for starters...

Simon Lyle

Ever wondered what’s so good about pensions – and how they work? We explore seven of the benefits of pensions, from getting more from your employer to tax efficiency and much more …

Many people build up a pension over the course of their working life. A pension can be a great, tax-efficient way to save, especially when you consider the record lows in interest rates that we have faced in recent years.

So with Pension Awareness Day this September, we celebrate the many benefits of a pension and highlight seven ways your pension can help you feel more confident about your financial future.


1. Workplace pensions make saving a team effort

Since 2012, more than 10 million people have been enrolled by their employer into a UK workplace pension. What’s so good about a workplace pension scheme is that your employer has to contribute too.

If you’re eligible and it’s suitable for you, but you haven’t joined your workplace pension scheme, or you’re not taking full advantage of what you’re entitled to, you’re passing up on what is effectively ‘free money’.

And if you think you had one in the past which you’ve lost track of (it happens, we all change jobs a lot more nowadays) don’t worry – they can be found.

Our article shows you how to track a pension down.


2. Getting in the savings habit couldn’t be simpler

Once you’re in a workplace pension, it couldn’t be easier to stay in the habit of saving because payments usually come straight from your salary.

Increasing the amount you put away even just a little each month could make a big difference to your pension pot in the long run.


3. Tax relief – your pension’s secret weapon

Tax relief on your pension savings can boost your savings and possibly make a real difference to the size of your pension pot in the future.

What is it?

Tax relief is normally based on the rate of income tax you pay. If you pay 20% basic rate income tax you get 20% relief, so it normally only costs you £80 to save £100 into your pension. And if you pay higher rates of income tax, saving can cost you even less. Not all pensions work the same way when it comes to how tax relief is delivered, so if you’re in a workplace pension you may want to check how it could work for you.

You can find out more by listening to our 2-minute Q&A on how to make the most of pension tax relief, or read our guide.


4. Give your money the chance to grow

The great thing about a pension is that any money paid in by you or your employer is invested on your behalf. This means it will have the chance to grow and hopefully beat inflation too, although do bear in mind that as it is an investment, its value can go down as well as up and you could get back less than was paid in.

Where you choose to invest could make a big difference to your future and when it comes to choosing and reviewing these investments you’ll want to think carefully about how involved you would like to be and how much risk you want to take, among other things.


5. Pensions give you more choices

When you eventually come to take money from your modern, flexible pension – currently you can from the age of 55 – you now have more choice and flexibility.

It’s up to you when and how you take your money. Some people choose to take their pension money but keep working, some take some or all of their money and retire, while others leave their pension savings untouched, so they can pass them on – or mix their options.

If you take more than your tax-free allowance (normally 25%) out of your pension, how much you continue to save into your pension and get tax relief on could be restricted by the Money Purchase Annual Allowance. This is currently £4,000 a year.

Our guide can help you make the most of your money and feel more confident about your options, or read more on Pensionwise.


6. Saving into your own pension puts you in control of your future

The State Pension alone isn’t likely to give you the lifestyle you’d hope for in retirement. The basic State Pension is less than a minimum wage salary and the age when you can claim it is rising. It’s currently 65, heading to 67 and could go higher still.

Saving into your pension puts you in control and gives you a lot more choices without having to wait until your late 60s or longer to reduce your hours or give up work.

How much you need to save will depend on how much you have so far, when you plan to retire and how much income you’d like to have when you stop working.

Try our pension calculator to see how much you could have in the future and visit the pensions section on our MoneyPlus site for guides, tips and expert insights.

Knowing what you can expect from your State Pension, and when, can help you plan better for an income in your life after work. Find out more in our State Pension – here’s what you need to know.


7. You can pass on your pension savings – sometimes tax free

You can nominate who you would like to receive your pension fund when you die, sometimes entirely tax free.

As pensions aren’t usually included in your estate there’s normally no inheritance tax (IHT) to pay on savings in your pension.

Just make sure you keep your beneficiary nomination form updated so your provider knows who you would like to benefit.

They will take this into account when deciding who to pay your pension savings to.

Read our guide to passing on your pension wealth tax efficiently or ‘Your pension when you die’ from Pensionwise.

The Pension Awareness campaign runs from 9-16 September with the aim of encouraging people to save for their future. Pensions Awareness Day is 15 September each year.

As a pension is an investment it can go down and up in value and you could get back less than you paid in.

Tax and legislation may change and the information here is based on our understanding in September 2019 and shouldn’t be taken as financial advice. Your own circumstances will have an impact on tax.