What’s a Pension?
In 2004 the independent Pensions Commission, noted that the UK had ‘the most complex pension system in the world’ (Pensions Commission 2004). It’s no wonder therefore that some people find the whole topic of pensions somewhat daunting. Let’s see if we can pick our way through some of the complexities to achieve a good degree of clarity for you.
Put simply, a pension is way of saving money to ensure you are able to live comfortably in your retirement. You may also require it to provide for additional financial needs besides just income - for example to afford residential home care for you and/or your spouse and to cover other eventualities relating to the aging process with it’s attendant shortcomings.
Help from the Tax Man.
UK Pensions receive important Tax Benefits…
For example the Government will contribute an extra £22.00 in Tax Relief for every £78.00 you place into your Pension if you are a basic rate Tax Payer (22%) and an extra £40.00 for every £60.00 you place if you are a higher rate (40%) tax payer (based on the tax year 2006/2007). There are upper limits on how much you will be able to invest in this manner but it’s important to understand that beginning your Pension Fund as soon as you can allows you to gain potentially in two ways…
A) Firstly by being given the extra Tax Relief to add to your fund as outlined above from the Government
B) Secondly by realising potential gains made from your money plus the Government Tax Relief invested in your fund. If your pension grows by an average of 10% per annum, the effects of compounding interest growth will benefit you more the longer your fund is open. Therefore it’s good to start saving as soon as possible to help maximise returns and prepare for the time when you won’t be working.
There are four basic types of pension…