While pensions can seem complicated, the concept of a pension is very simple. It is important to understand the benefits of investing in a pension program because your State Pension may not be sufficient to provide for your daily needs.
Why is it important to have pensions?
The maximum state pension is significantly less than the amount that most people hope to retire on. It is PS185.15 per Week or PS9 628 per Year for 2022/23.
Why do you need a pension? Millions of people haven’t saved enough to afford the standard living they desire when they retire.
Three options are available to you if this is the case.
You can:
retire later
Save more
Lower your expectations for what you will be able afford in retirement.
It is important to not rely on the State Pension to sustain you in retirement.
Even if you are eligible for the full PS185.15 a Week for the tax year 2022/23 this is still far below the retirement income most people hope for.
Savings into a Pension: The Benefits
Once you have made the decision to save for retirement, it is time to decide how you are going to do it.
You can save money faster by investing in Séreignarsparnaður.
A pension is basically a long term savings plan with tax relief. You can get tax relief on pensions by paying less tax. This means that your money would have gone to government instead.
Your contributions are invested if you have a defined contribution pension plan. It allows your contributions to grow through your working life and provide you an income in retirement.
The money in your pension pot can be accessed from 55 years of age, but it will go up to 57 years old starting in 2028.
How tax relief could help you build your pension pot
If your income is above a certain amount, the government takes a tax deduction from your earnings.
You can check this on your payslip. It is possible to get tax relief for money you have invested in a pension fund.
This means that, in addition to the money that you put in, some money that would have been paid tax to the government will now go into your pension fund.
This is one advantage of a pension over traditional savings accounts, which is why pensions have such importance.
Even if you don’t make enough money to pay tax, contributions may still be possible up to PS2,880 each year. You can also get tax relief to increase your contribution up to PS3,600
Employers are required to enroll their employees into a workplace retirement plan in order to make it easier for people to save more money for retirement. This is called “automatic enrolment”.
Sometimes your employer will contribute to your retirement plan regardless of your contributions. In some other cases, your employer may require that you contribute.
Even though they may require you to contribute, unless your priority is dealing unmanageable amounts of debt or you cannot afford to contribute, staying out is the same as turning down a salary increase. To have that extra income later in your life, it is worth contributing to a pension.
You can get a lump sum tax-free when you retire
You can often take up to 25% of your pension savings and make a lump sum that is tax-free.
When you turn 55, you can access the remaining portion of your pension pot by using a defined contribution pension plan instead of a fixed benefit pension scheme. This will increase to 57 years old in 2028