Dealing with your pension might feel like a long way off, but a leading West Midlands Financial Planning and accountancy firm says that thinking about the money you have squirrelled away for the future is extremely important.

Ahead of Pension Awareness Day this Wednesday (September 15), Glen Callow, wealth director at Prime Wealth Planning, which is part of Prime Accountants Group with offices in Solihull, Coventry and Birmingham, provides insight into why pensions are so important and how you can invest into a financially secure retirement.

Glen said: “A pension is like a turbo-charged savings account because the money invested receives huge tax benefits, upfront and during the life of the plan.”

Free money from your employer

“A key plus of a pension plan is the tax relief. You receive tax relief on contributions subject to certain conditions and limits. Effectively you’re giving up disposable income now in exchange for a future pay rise in the form of pension income.

“If you are 22 or over and earn more than £10,000 per annum then you should automatically be enrolled into your employer’s workplace pensions scheme.

“This typically requires a contribution from the employer of three per cent and five per cent from yourself. The employer’s contribution of three per cent is essentially free money!

“The money you pay will likely enter your scheme free of taxation whereas if you had taken the money as earnings you would have suffered income tax and national insurance.

“Some may even benefit from salary sacrifice – a scheme where you give up some of your monthly earnings and your employer puts the further saving that they make on national insurance into your pot.

“All this money then grows in a capital gains and income tax free environment.  You can withdraw 25 per cent of the pot, completely free of tax from the age of 55 or 57 depending on when you were born and pay income tax on the remainder as and when this is paid to you as income.

“Regardless of the free money paid by your employer the tax relief and ongoing tax efficiency of pensions make them hugely attractive savings vehicles.

“A base rate (20 per cent) tax payer (£15,000 to £50,000 in earnings) would have a 25 per cent effective increase in their pension contribution versus receiving this personally. For example, £80 taxed becomes £100 not taxed in your pension. For high-rate tax payers this means a 66 per cent uplift from £60 to £100.

Tax-free lump sum

Glen says that when the time comes to take money out of your pension, a quarter (25 per cent) of your life savings will be free from the taxman.

What’s more, there is no tax on the fund being passed to the next generation if the member dies before the age of 75. If the member dies post-75 then the beneficiary would pay income tax when they withdraw the fund at their marginal rate.

Start now for compounded growth

In the world of social media, it can be easy to be swayed towards investing in ‘get rich quick’ opportunities with unregulated assets such as cryptocurrencies, Glen said. He urges young professionals and millennials alike to not be put off by pension illustrations and forecasts that show what you perceive to be a low income in the future for the money they sacrifice now.  These may well appear low but are based on a very low-interest rate world to deliver that income.  Instead, consider how much harder your savings would have to work should they be depleted by tax both initially and throughout the life of your pension!

He added: “Starting pension saving early means your money has time to compound and grow – this will mean a reduced percentage of your earnings will be allocated later in life.

“The numbers don’t lie! Any personal investment would have to work very hard to beat the massive tax advantages that go towards a pension.