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Pensions: 7 Reasons Why You Should Set Up A Pension

Updated: Jun 17

1. State pension alone may not give you the retirement you want or deserve.

The UK State Pension exists to cover basic needs for people in later life. As a general overview for how much State Pension you could receive, if you are eligible for the new State Pension, you can get £175.50 per week. This works out at about £9,100 a year as it currently stands.

You can visit the gov.uk website to check when you will be eligible to claim your State Pension, but most people will receive it at the age of 67 or 68.

Depending on the lifestyle you want in retirement, relying solely on the State Pension may be okay for you - but to get the most out of your retirement, the State Pension should really be considered as a top up for your other pension provisions.

The Pension and Lifetime Savings Association suggests a single person who wants a 'moderate lifestyle' in retirement would require an annual income of around £20,000 - which is more than double the current State Pension.

If you're not willing to give up going out for meals with friends and family or a few holidays in your golden years, then we would strongly advise setting up a pension!

2. Your older self needs you now.

Its a good idea to start saving for your retirement as early as possible, or you may find yourself playing catch-up down the line.

If you were to start paying into your pension at a young age, you would have to pay less each month over a longer period to end up with the same pension pot.

Your older self could definitely do with some forward planning on your behalf!

3. It might seem a while away, but you will eventually retire so you will eventually need a retirement income.

Your current financial priorities will always be different and based solely on your personal circumstances, but prioritising your pension is a great way to help yourself in the long-term.

There are many reasons to save throughout life, whether it be for a new car or a luxurious holiday, and only you can decide what your priorities are - just don't forget that you will eventually retire, so you will eventually need a retirement income!

4. A pension is a tax wrapper with big tax advantages.

If your pension contributions come out of your pay before tax, they don't count as part of your taxable salary - you don't pay any tax on your contributions at all!

If your contributions are paid out of your salary after tax, your pension scheme will add basic-rate tax relief when you make your contribution. This means a £100 pension contribution will cost you £80 if you pay basic-rate income tax, £60 if you pay higher-rate tax and £55 if you pay the top rate of income tax. Not bad!

5. The government gives you tax relief.

You can start taking money out of your pension at age 55, (increasing to 57 from 2028) by which point you are also entitled to a tax-free lump sum of 25%.

It is worth keeping in mind that some people may not have enough in their pension pot by the time they hit 55, so taking the lump sum could be damaging in the long-term - but that's where retirement planning and financial advice come in!

6. Your investments underlying in the pension grow tax free.

Once the contributions to your pension scheme become invested, they grow largely free of taxes.

This essentially means that they should grow faster than equivalent taxable investment funds!

7. There are so many investment funds available, you can make your money work for you.

When it comes to picking which funds you want to invest your pension into, there's a huge variety of options available.

This means you can make your money work for you, and have the freedom to choose where you invest, based on your attitude to risk and any personal preferences or ethical reasons you may have.

While the process can seem daunting at first, it doesn't have to be - speak to an adviser at 7FP to get your pension plan in place. It's never too early, and your older self will thank you for it later!

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