Money for Nothing Tax Efficient Pensions
It’s not often you get something for nothing, but we do with a pension. It’s one of the most efficient ways to save. Why don’t you let the government help your money grow faster?
The main advantage of a pension plan is that the government will help you with your payments. A pension is a savings plan that will give you tax relief while you save (the value of this depends on your own financial circumstances). A financial adviser will let you know how much you will get. This is based on the current tax law and HM revenue and customs practice which may change.
Basic Rate Tax Payer Pensions
£200 for every £1000 saved is paid by the government.
Your Payment £800
Tax Relief £200
Total in Pension £1000
Higher Rate Tax Payer Pensions
If you pay higher rate tax then you can claim back another 20% through your annual tax return. This way you pay £600 into your plan and the government will make it to £1000. You see where we get the term money for nothing now.
Your Payment £800
Tax Relief £200
Tax Relief You Reclaim £200
Cost to You £600
Total in Pension £1000
Long term benefits of Tax Relief
Graph 1 Shows The total Paid In to Pension
Assumptions £100 per month Net Basic Rate Tax 20% higher rate Tax 40%
Graph 2 Shows The Maturity Value
Assumptions £100 per month net Annual Management Charge of 1% growth rate of 7% Basic Rate Tax 20% higher rate Tax 40%
All figures are for illustration purposes only and are not guaranteed. The graphs are used to show you the tax efficient benefits of pensions. Tax year 2009 - 2009. Figures from Aegon Scottish Equitable Your financial adviser can help you set up your pension plan.
Any assistance you can garner in improving your savings/retirement position, especially when its government assistance, is a good thing. The graphs really bring home this point clearly.
Good points for all workers to remember and to use in their financial planning. This idea applies to U.S. workers as well as U.K. The details are a bit different. In the U.S. you can either get a tax break in the year you earn, with a conventional IRA or 401(k), or you can defer the tax break until you withdraw the funds, with a Roth IRA or a Roth 401(k).
The other advice hidden in the graph: start young!
Certainly start young… for every 5 years that you delay saving, your final pension will be halved.
So a person who starts saving at the age of 25 will have twice the pension of someone who doesn’t start saving until age 30. And for most people, it’s almost impossible to make up that loss.
Every five years delayed halves your final pension? I’m 23 and I didn’t realise there was an exponential curve to pensions… better start saving soon!