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Is A Pension Really Worth It

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  • Posted date:
  • 05-08-2019
Is A Pension Really Worth It

One of the benefits of pension schemes is that, in the long-run, you will get more out of retirement than what you put in. People who save into a workplace pension not only benefit from their employer's contributions but also the tax relief that the government offers. 

Some people are still paranoid at the mention of pension schemes as they are afraid of losing all their money if their employer ever becomes bankrupt. While this is a genuine concern, it is worth noting that pensions have several layers of protection aimed at preventing the possible loss of your money.


WORKPLACE PENSIONS

The majority of pension plans involve you and your employer saving into a pension pot. Irrespective of your employer contributes to the pension; everything that goes into the pension plan is yours. Your employer's role ends with the contribution they make. That money is usually held by another party referred to as a trustee, or the pension provider.

In essence, if your employer goes bust, your money is always safe. In many instances, FSCS (Financial Services Compensation Scheme) will protect your pension. You are entitled to receive an amount when you retire with a defined benefit scheme. The amount paid is determined by your final salary or the average salary you obtained during your employment.

The Pension Protection Fund covers pensions of this sort. If the company you work for loses all its money, and you have surpassed the average pension age defined by your scheme. The fund will cover 100 per cent of the money you were getting at the time the employer went bust. On the other hand, if you haven't reached the average pension age, you will receive compensation worth 90 per cent of the pension due. However, this might have a ceiling if your payment exceeds a predetermined amount.

As you can see, workplace pension offers one of the safest ways of getting the retirement package you desire. 

OTHER BENEFITS OF PENSION PLANS INCLUDE:

TAX RELIEF ON CONTRIBUTIONS

Besides helping you ensure a financially secure future upon retirement, a pension plan also converts into tax relief. The type of tax relief you get is dependent on whether you are a higher-rate or basic-rate taxpayer.

For every amount you contribute towards a pension plan, you get a tax refund, if you are under 75 years of age – subject to a yearly allowance.

WHAT IS THE EXACT VALUE OF THE TAX RELIEF?

If you put the money into your pension plan, or if you instruct the employer to deduct from your pay packet. You automatically get a 20 per cent tax refund (if you are a basic-rate taxpayer) from the government.

While you don't receive it in cash, the tax refund goes into your pension. Higher-rate taxpayers and top-rate taxpayers may request a further 20 per cent and 25 per cent respectively. Individuals who are part of a workplace pension may not need to reclaim the tax relief if their employers deduct contributions less than the tax from their salary.

TAX-FREE GAINS FROM INVESTMENTS

The benefits you obtain from the investments you make with that money are tax-free.

It is advisable to check where you fall within the tax bracket as if you fall into the category of people who qualify a tax refund, but you don't reclaim it, you won't benefit from tax relief. The HMRC provides further details on how to reclaim tax. 

Some employers put your money straight to the pension from your pre-tax pay. If that's your current situation, it means it's never taxed, so you still win!


Paul Dodd Asset Management Limited is committed to providing independent financial management throughout Leeds and North Yorkshire. If you need to speak to our pension planning specialist today, please get in touch to discuss the ways that we can help you.