Why are pensions so tax efficient?

The government are keen to help individuals make their own provision to fund retirement. They provide a state pension based on your National Insurance (NI) contribution record. Did you know that a full pension requires 35 years of NI contributions?

Suppose you only pay NI for 30 years when you are entitled to draw your pension – you will receive a proportionally less weekly benefit. This could happen if you could not work, and the provision to ‘buy back’ years may eventually disappear – so beware.

If you contribute to a private pension, you get tax relief on your contributions at the highest rate that you pay income tax. This is because individuals with pensions have less need to draw benefits than those without.

Further benefits include tax-free cash when you draw benefits and a tax-efficient investment environment when growing your fund. Pensions can even reduce exposure to taxes such as Capital Gains and Inheritance Tax.

Sometimes a combination of tax-efficient investments within an Individual Savings Account (ISA) can work well with a pension portfolio to provide maximum flexibility when funding retirement.

There are a few exceptions, but in recent years all employers have had to set up and contribute to a workplace pension scheme on behalf of their employees. This means your employer, and you contribute and  the tax system adds some as well. A well-managed investment fund (hopefully) grows the funds so that when you stop work, there is another fund to add to your state pension.

If the subject appears complicated (and it can be), speak with an Independent financial planner to explain how you can make your money work harder for you, and to ensure you are not missing out on any ‘free’ money!

Eamonn Dorling Dip PFS

Senior Independent Financial Adviser

Brooks Wealth Management

Tel: 01733 314553 or 07767 795816

Email: Eamonn@brookswealth.co.uk

Brooks Wealth Management is a trading style of Ampris Limited, an appointed representative of Wealthline Limited, registered in England 08761632 (Registered office: 8a Cowgate, Peterborough) Wealthline Limited are authorised and regulated by the Financial Conduct Authority 684319