Five reasons why your pension is the most important financial asset you’ll ever have

While it can be daunting to get started with retirement saving, and tempting to put it off until later, here are the five top reasons why your pension is so important and how using it to its best advantage can turbocharge your family’s wealth.

Everyone wants a comfortable retirement

The top reason to have a pension, of course, is to ensure that you can live comfortably during retirement. No-one knows what the future holds or how they will fare during their later years, but a private pension gives you money you can withdraw flexibly to use to fund whatever you want and need, or the choice of buying an annuity to give you a guaranteed income for life, depending on your preference.

Pensions give the best tax breaks

Nobody wants to pay any more tax than they must, and the very best way to ensure you do not is to max out your pension. 

Most of us can put £40,000 into a pension every year and the basic rate income tax we’ve paid on that amount is added into the pension as well. Any extra tax you pay as a higher or additional rate taxpayer can be claimed back through your tax return. The only exceptions are those who earn over £200,000 a year, whose £40,000 pension allowance is gradually removed, or those who have already accessed their pension.

This huge tax break allows your retirement fund to grow far faster and more tax-efficiently than any other savings pot. Putting money in ISAs does not give you the same tax breaks, although money still grows without taxation within these tax wrappers as well.

Pensions can be accessed sooner than you might expect

While most of us are expecting to work into our mid or late 60s, private pensions can be accessed at the relatively young age of 55, set to rise to 57. This means that the money in them – including the 25 per cent tax-free lump sum that everyone is allowed to take from their pot – is accessible for many reasons that have nothing to do with retirement, such as paying for a child’s house deposit or a grandchild’s school fees. 

The money you’ve saved needs to cover your own retirement, of course, but this flexibility in how you take your pension gives families many options.

Pension saving can help you keep your Child Benefit, and beat the NI rise

Saving into a pension can save you from tax in other areas and even help you to keep your child’s child benefit if your income is just above the threshold.

If your employer has a Salary Sacrifice scheme, which means that they take pension contributions out of your salary before paying it to you, this reduces the amount of national insurance you pay on money you earn and saves your employer money too. 

For those whose salary sits near the £50,000-£60,000 threshold for losing your Child Benefit (the amount paid to you is tapered depending on how much you earn over £50,000), paying some of your salary into your pension via salary sacrifice can also take you below the threshold so you receive the payment.

Pensions are a great legacy

Many of us want to leave a legacy to the next generation but are concerned about it being swallowed up in inheritance tax. Leaving a pension untouched and passing it on to the next generation can be a very tax-efficient way to give money to family.

Your pension does not count as part of your estate for Inheritance Tax purposes and if you die before the age of 75, anyone who inherits it does not pay any tax. If you die after that age, they will pay income tax on it at their own marginal rate of tax.