Pensions give you instant tax relief as well as future comfort

 Many of us are acutely aware of the need to plan for retirement yet do nothing about it. Between childcare fees, rent or mortgage and all the other miscellaneous costs and tasks involved in running a home and a life, starting a pension often gets put on the back burner. 

With many things on your to-do list, putting them off and picking them up at a later stage is fine. However, when it comes to sorting out your pension, the adage “time is money” has never been more apt: delaying your retirement planning now can cost you in both the short and long term. Those who take an early and ongoing interest in their retirement planning typically end up with better outcomes.

Setting up a pension really is a no-brainer in terms of the benefits you could gain. In the short term, pension contributions can reduce your tax liability by entitling you to tax relief. Depending on your age and income, you can offset contributions made to your private or company pension against your current tax liability and the tax paid in the previous year.

As well as this immediate tax savings benefit, there is also the potential to boost your pension savings over time using the power of compound interest. Compound interest is growth on top of growth and can increase the value of your pension savings in later years. 

The sooner you build up a significant pension savings pot, the greater the impact compounding can have on your savings while the longer you delay the more you will need to put more aside each year later on.

How can you go about setting up a pension and planning properly for retirement? The first step is to engage with a professional financial adviser. This can be someone provided by your employer or of your own choosing. The adviser will help you gauge what you should be saving annually and reconcile this with what you can afford to save. Remember that the younger you are, the more time you have to plan for retirement — but be careful not to take this time for granted.

If you are already saving for retirement and approaching your chosen retirement date, it is equally important to plan appropriately and seek professional financial advice because you no longer have the luxury of as much time on your side. 

Think about what age you plan to retire at and work out what income you will require throughout retirement. Factor in your likely living costs in retirement and estimate, based on average life expectancy, how long you think you will live for in retirement. 

Once you have done this budgeting exercise, identify what your current and any previous private pensions will provide at your chosen retirement age. In addition to this, find out what level of state pension you and your spouse will be entitled to and at what age. 

And, of course, take into account any non-pension assets you have, such as cash, investments or property. Consider whether you should be paying additional voluntary contributions (AVCs) or whether you should increase the amount of AVCs you are already paying. And identify whether an approved retirement fund or an annuity is the best option for you in retirement.

Working with a financial adviser can help make these important life decisions far less daunting than they may seem now. You will likely need an adviser throughout your retirement, so it is important to spend time choosing someone you trust and can work with on an ongoing basis. Make sure the adviser is regulated and suitably qualified to give you appropriate advice. Ask friends, family or colleagues who have already gone through retirement whom they would recommend.

For many of us, outside of our family home, our pension is our biggest financial asset. It is vitally important to invest time in understanding what it can and can’t do for you. Don’t be afraid of your pension: embrace it and all it can do for you. You will reap the rewards throughout your lifetime, both before and after retirement.

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