Want to boost your savings? Easy – use a pension. You might be put off by the fact that saving in a pension scheme means locking your money away until the age of 55, but there are handsome rewards for doing so. The government tops up your savings by 20%, 40% or 45%, depending on your marginal rate, which is a huge boost to your pension pot.
So, every £800 paid in by a basic-rate taxpayer, for example, will automatically turn into £1,000. Higher-rate taxpayers can claim back an additional £200 through self-assessment, boosting their returns even more. Diverting any cash you can spare into a pension is sensible no matter what your age.
Not everyone can afford to save as much as they’d like each year, but putting a little something away every month is better than doing nothing. The earlier you start, the more time your money will have to grow. Saving just £100 a month from the age of 25 would result in a pension pot of £152,602 at the age of 65, according to calculations by Square Mile, the investment research group. But delaying retirement saving until age 30 would see the fund value at 65 drop to £113,609, and leaving it until age 40 would mean a further reduced fund value of £59,551. These figures are based on a standard growth of 5%.
Saving later in life
If you’re in or nearing your fifties, it’s still worthwhile using a pension. While the growth will be limited with less time to go until retirement, you can bag the relief on contributions at your highest income tax rate while you’re earning. Then typically in retirement you drop into a lower tax band. So while you might get tax relief on contributions at the higher rate, you can end up paying tax on the income at the basic rate.
Plus, with the opportunity to take 25% of the fund as tax-free cash, you only end up paying tax on three quarters of the pot. And you don’t have to wait long until you can get your hands on the cash again. What’s not to like?
To maximise the opportunity to boost your savings, the first port of call is to check if you can increase contributions to a workplace pension scheme where your employer matches your deposits. If you don’t want to (or can’t) plough more money into an employee scheme, you can run a personal pension alongside it, taking out a self-invested personal pension (Sipp) with a platform such as Hargreaves Lansdown, Fidelity or Interactive Investor (click here to review D2C platforms and their product offerings). There’s a whole host to choose from and it’s worth shopping around to find the one that suits you as they all have different services and charging structures for pensions.