Today, there are a wide variety of ways to save for the future. Why should you open a pension when there are so many great alternatives?
In this article, we'll look at the benefits of pensions and why they might be right for you.
Pensions provide a simple, tax-efficient way to save for life after work. A pension is a long-term investment, giving you the tools you need to grow your savings and fund your lifestyle in the future.
A good way to think about pensions is a life-long savings account. As you go through your career, your pension comes right along with you. Because of the prolonged period, you're contributing into your pension, the opportunity for growth tends to be higher than any regular savings account.
Over time, pensions tend to offer more growth than a regular savings account.
Then, when you're ready to access your pot, you have a few different options. This is where the flexibility of pension withdrawal really shines.
Here are a few of the ways a pension can help you get the most out of your money.
Every time you contribute into a pension, the government adds a bonus on top via tax relief.
Let's say you add £100 to your pot. If you're a basic rate taxpayer, you'll get £25 extra in your pot free as tax relief. That's because you pay 20% of your income as tax - 20% of £125 is £100, and that's your free top-up!
Higher rate taxpayers will get even more out of a pension. That same £100 would become £166 if you earn over £50,270 - although you will have to claim some of this via a self-assessment tax return.
You can also withdraw the first 25% of your pot completely tax-free when you're ready to access your pension. You can take out the rest in a few different ways, depending on your circumstances.
For more information about the tax advantages of pensions, check out our article on pension tax relief.
In the UK, we have many options for saving our hard-earned money. Let's take a look at how pensions compare to a few of the alternatives.
As a method of saving for the future, pensions are often compared to an Individual Savings Account (ISA)
Pensions and ISAs both offer a tax-efficient way to save for the future, however, a pension might be better for you if:
For more on this, head to our pension or ISA comparison.
If you’re not sure what option is best for you, then you should speak to a financial adviser who can carry out a review of your specific circumstances and suggest the best savings strategy for your goals.
Another popular way to save for later life is through a Lifetime ISA (LISA)
As with pensions, you'll get 25% back on your contributions as tax relief. However, with a LISA, this bonus is capped at £4,000. This is where the power of a pension comes in.
You can get tax relief from a pension on up to £60,000 a year (or 100% of your earnings), meaning your potential tax bonus is significantly higher - particularly for higher earners.
A LISA also has a lifetime limit of £128,000 - that's the full amount you can hold in your Lifetime ISA and still benefit from tax relief. The maximum amount you can add to your pension (while still getting all the tax advantages is currently £1,073m.
Here are a couple more reasons a pension might be the better option for you: