As you approach retirement, you probably want to know when you can afford to stop working. Having worked hard throughout your career you deserve to enjoy your retirement without having to worry about your finances. It may be worth reviewing your pension contributions to make sure you are taking advantage of the incentives offered by the government and your employer.
Make the most of tax relief…
The government tops up your pension contributions in the form of tax relief at
your highest rate of income tax to encourage you to save. Basic rate taxpayers
receive tax relief of 20%, while higher rate and additional rate taxpayers can
claim back 20% and 25% respectively through their tax returns.
…and understand employer contributions
Since 2012, employers have been legally
obliged to automatically enrol employees in a pension scheme, although you can
opt out. As an incentive, employers top up employee contributions. The
government increased the minimum contribution to 8% from April 2019 – at least
3% from employers with employees making up the balance. It is worth remembering
that the employee’s contribution includes tax relief.
Are you saving enough?
There are no fixed rules about how much you should contribute to your pension
because of course everyone’s circumstances are different. However, one rule of
thumb is to take the age you started saving and divide it by two to give you
the percentage of your salary which you might wish to put away each year. So,
if you set up your pension at the age of 30, you could aim to pay in 15% of
your salary.
Stick within the limits
There are rules covering how much you can contribute, and you could face a
hefty tax bill if you break them. The annual allowance for the 2019/20 tax year
is £40,000 or your full salary (whichever is lower).
There is also the lifetime allowance – the maximum amount you can withdraw from a pension scheme. It is currently £1,055,000 and likely to increase with inflation. It’s probably wise to keep a close eye on the value of your pension if it starts approaching this limit.
Deciding whether or not you can afford to retire is a significant consideration, and so it makes good sense to regularly review how much you are saving and ensure you are taking full advantage of any incentives.
Did you know…?
Gender pay gap
Pensions for women are £7500 less than men on average and yet on average women
live for three years longer than men.
A nation unprepared for retirement
Over half of the British population admits to either not saving for a pension
or not saving enough for the retirement that they would like to live.
The rise of pensioners
In 1901, there were ten people working for every pensioner. By 2050 it has been
predicted that there will be one pensioner to every two workers.
The value of your investments can fall as well as rise, and you may get back less than you invest.
HM Revenue and Customs practice and the law relating to
taxation are complex and subject to individual circumstances and changes which
cannot be foreseen.