Financial health underpins mental and physical health. Secondsight found that 67% of the working population receive no financial education from their employers. They also identified that only 20% of employees had a coherent financial plan. A pension is one means of setting yourself up for a healthy financial future, so what do you need to know?
Pensions are flexible
It’s important to remember that pensions aren’t tied to a particular age. A pension can start at any time after your 55th birthday – or at any time at all if you have to stop work due to ill health. The benefits can take a number of different forms:
- An income stream payable for the rest of your life
- A tax-free lump sum and a reduced pension
- Varying amounts from your own fund that you control
- A series of lump sums, with a quarter of each tax-free
It’s important to remember that you can often tailor what is paid – and the form it takes – in order to suit your own circumstances.
Pension saving is tax-efficient
Saving into a pension is possibly the most tax-efficient investment you will ever make. For over 90 years, the UK has had special tax concessions for pension saving to encourage employers to offer pension schemes and for employees to join them.
For all employees, other than very high earners, your own pension contributions are completely tax-exempt. To make a contribution of £1.00, you need contribute just 80p.
All employers have to provide pension scheme
Since 2018, all employers have had to provide a pension scheme for their employees. In most cases, they must enrol new employees into their scheme automatically.
From April 2019, the overall rate of contribution into a pension scheme will be 8% of your earnings – at least half of which must be paid by the employer. This makes membership of the pension scheme a particularly valuable benefit for employees; the employer pension contribution is ‘free money’ that will not be payable to them in any other form.
The employer’s pension scheme must also take responsibility for investing contributions in a way that is cost-effective and prepares for your retirement. However, you are free to choose an alternative form of investment if this would better suit your investment or ethical objectives.
This blog was developed in collaboration with the Pension Management Institute, a professional body responsible for promoting excellence in pensions and lifetime savings.