UK tax wrappers

How can pensions help you save tax?

Like an ISA, a pension is a way for you to legally avoid paying so much tax on your savings. The UK government wants you to save for your old age 👵🏼, so it gives you a tax break to encourage you.

Of course, pensions are only useful if you don’t need access to your money before retirement (currently you cannot withdraw before the age of 55), but they’re important to think about if you dream of sipping cocktails and taking luxury cruises in later life. Or even just having enough cash to heat your home.

How does your pension work?

The contributions you make to your pension come straight out of your salary and don’t attract any income tax upfront, making them “tax-efficient”. This effectively means the money you put in your pension is boosted by at least a quarter – just like with the Lifetime ISAs we talked about in the last session.

After you retire you’ll have to pay tax on the income you take from your pension, but this will probably be less than the tax you’d have to pay if you were still working. And, your personal tax allowance will allow you to get at least some of your money out each year, completely tax-free. 💸

Your pension is really just an investment product like any other, although if you work for a company and are enrolled in their pension plan you might have only limited choice about where exactly your money is invested.

The up side

The massive plus side 🔝 of company pensions, however, is, yep once again, free money. Many companies will match at least some of their employees’ pension contributions each month – so if you funnel, say, 10% of your salary into your pension your employer might add another 8%.

The precise figures will depend on the terms your employer offers. Make sure to ask what they are – if you earn more than £520 a month, they legally have to contribute at least 3% of your salary.

Because of this free money from your employer, you may be better off maximising your pension contributions before you do any direct investing yourself. 📈

Self-Invested Personal Pension (SIPP)

If you want more control over where your pension money is invested you may be eligible to take the reins yourself and transfer your funds to a Self-Invested Personal Pension, or SIPP. 🎯

A SIPP allows you to pool together pensions from previous jobs, as well as any private policies you may have, and invest them in a wide range of assets. You can select and manage your investments yourself, or have a professional investment manager make the decisions for you.

Managing your pension in this way can become expensive, so keep an eye 👀 out to make sure you aren’t stung with high fees.

But as we said earlier, pensions are only useful if you can do without your savings until the age of 55. If you need them earlier, there’s another product you can consider.

The takeaway

Pensions are another tax-efficient way of investing your savings, and if your employer matches your contribution, you’re getting free money too.

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Keep in mind that when you invest, your capital is at risk and this learning guide is for information only and is not investment advice. Remember that any tax benefits are based on personal circumstances with are subject to change.