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Is it too late to set up a pension?

We all know that the best time to start a pension is when you first enter the workforce but what if life just got in the way? Is it really too late to start a pension?

It’s important to say that in general, pensions are designed as longer-term investments but as with all things the picture isn’t always black and white.

In this post, we’ll look at some of the broader issues involved but a word of warning here – we can’t give you specific advice about your pension and if you decide to start saving then you do need to take personal advice.

Work out how much you need to live on

The first step is to think about how much you need to live on when you retire.

At the time of writing the new standard state pension is £175.20 per person per week as long as you have at least 10 years of qualifying contributions on your National Insurance record.

The question is could you live on that?

If not then use one of the many pension calculators to work out what you could receive from any current pension arrangements you have. You can find an excellent one at the Money Advice Service.

Using a pension calculator will let you know how much you need to be putting by each month to meet your target.

What if you have enough in your pot?

If you find that you have plenty in your pension pot to provide for your retirement then you may be thinking that you shouldn’t make any more contributions however you may well be surprised to learn that the opposite could be true.

Contributions to a pension scheme that are under the limit of £40,000 per year are tax-free.

If you pay into a pension pot out of your salary before tax then you will essentially receive tax relief at your highest rate because the contributions are not counted as part of your taxable income.

If you pay into a scheme after-tax the pension pot will be topped up by an amount equal to basic rate tax. So this means that for a basic rate taxpayer the government will boost every £100 you put into a qualifying scheme by £20.

When you reach the age of 55 you can begin to take tax-free lump sums out of your pot up to a maximum of 25% of the total.

This means that not only is paying into a pension likely to reduce your effective rate of tax or receive an immediate boost but also that the closer you are to the age of 55 the sooner you can be taking a tax-free lump sum.

What if you haven’t got enough in your pot?

As part of your overall financial plan, you should have savings for emergencies and for longer-term plans.

Your retirement savings are important, especially if you feel that you won’t be able to manage on the state pension.

Whilst we’d suggest that at the minimum you need to have a short-term emergency fund, the fact remains that putting money aside for a longer-term in your pension is always a good idea.

The tax benefits are such that the likelihood is that an investment into a pension is probably going to outstrip any other form of savings plan you might have.

The important thing to bear in mind is that there will be charges and you should make sure that the fund is invested in very stable places but if you are only a few years away from retirement then putting as much as you feel comfortable with into your pot is probably a good move.

Remember also that any growth that the pension fund does make whilst you are invested in it is tax-free so again will outstrip the same investment made outside of a pension wrapper.

It’s never too late

If you are facing retirement and you are wondering about putting money into a pension then it is certainly an attractive option.

The growth you could see, together with the tax incentives make a pension an excellent place to put your cash.

As well as providing an income you can also take a tax-free lump sum so the money isn’t always locked up forever.

Above all, we’d say that it is a mistake to make these decisions without talking to a specialist pension advisor and certainly without getting advice on your overall financial plan.

If you’d like to talk to us about your ideas for the future then contact us and we’ll talk you through the options.