*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you are unsure if a pension is right for you, please seek financial advice.
Pension Awareness Week is here, and it’s the perfect time to tackle some of the most common pension questions we hear at Moneyfarm. Whether you’re just starting your savings journey or looking to maximise your future nest egg, we’re here to help make sense of it all.
Understanding the basics: What is a pension?
Pensions can seem confusing, but they don’t have to be. At its core, a pension is a savings plan designed to provide you with an income when you retire. Throughout your working life, you contribute money to your pension, and over time, those contributions (hopefully) grow into a fund that supports you in your retirement years.
There are several types of pensions to consider, such as workplace pensions, personal pensions, and State Pension. While each has its own nuances, they all share the same goal—helping you build a secure financial future.
How much should you contribute to your pension?
One of our most frequent questions is, “How much should I contribute to my pension?” A good rule of thumb is to aim for contributions that amount to 12-15% of your annual salary. This might sound daunting, but remember—every little bit helps. Even if you’re not hitting that target yet, any regular contributions are better than none.
If you have a workplace pension, your employer is likely contributing as well, which can significantly boost your savings. On top of that, the government offers tax relief on pension contributions, further helping you reach that 12-15% target each month.
Understanding pension tax relief
Pension Tax Relief is one of the most significant benefits of saving into a pension. When you contribute to a personal or workplace pension, the government effectively adds money to your pension through tax relief. This can happen in two ways:
- Relief at source: Your pension provider claims the tax relief on your behalf.
- Salary sacrifice: Your pension contribution is taken out of your gross pay before you’re taxed.
For example, if you’re a basic rate taxpayer and contribute £80 to your pension, the government tops it up to £100. If you’re a higher-rate taxpayer, you can claim even more through your tax return. Essentially, it’s free money added to your pension, helping you secure your future.
What happens to your pension when you change jobs?
Another common question is, “What happens to my pension if I change jobs?” The good news is your pension savings are yours to keep. You can leave your pension with your old provider, transfer it to your new workplace pension, or move it into a personal pension plan.
It’s wise to keep track of your old pensions to ensure they’re still working hard for you. In fact, this might be a great time to consider consolidating your old pensions, making them easier to manage and ensuring you don’t lose track of any of your savings.
Lost a pension? We can help
If you’ve lost track of a pension, don’t worry. Our Find, Check & Transfer service can help you locate lost pensions, check them for valuable benefits or penalties, and combine them into a new pension plan that’s optimally invested for your future.
Take control of your financial future this Pension Awareness Week
Pension Awareness Week is all about empowering you with the knowledge and confidence to take charge of your financial future. Understanding how your pension works is the first step toward a brighter retirement.
Start taking control of your pension today. If you need any assistance, our team of expert consultants are always on hand to help.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
