A friend recently told me that she was starting to consider saving into a pension and that she had not considered it until then as her earnings only qualified for 20% tax relief. While her salary was not substantial, it was actually the tax relief at 20% that put her off, not the fact that she could not afford it. She was actually savings into a long term deposit savings plan instead.
She also queried with me whether as she still paying the standard rate of tax relief on most of her earnings, whether the tax relief on her pension contribution would still qualify for the higher rate of 40%. The answer is yes. Even where a small amount of earnings are taxed at 40%, you can avail of 40% tax relief on the total pension savings contribution.
Whilst everyone’s circumstances differ and long term savings are also essential, I felt it was a pity, as she believed in the concept of pensions but the tax relief rate had put her off.
We all need to seriously consider pensions now. For anyone born after January 1st, 1961, the State pension only starts at the age of 68. For those born from January 1955 and December 31st, 1960, it starts at age 67.
This leaves a big gap should you wish to (or indeed are made to!) retire at 65 or earlier. At the very least you will need to fund for those years from retirement age of say 65 years to 67/68.
Saving into a pension is essential whether you will pay tax at 20% or 40%. Having a pension fund in retirement will give you more life choices when you do retire.
Crucially once saving into pension, you will get tax free growth on the savings as they grow. On retirement you will likely get 25% of the pension fund back as a tax free lump sum.
In comparison, my friend was saving into a deposit account on which 41% DIRT Tax applied. DIRT tax is deducted on savings interest in deposit Accounts.
Therefore regardless of your tax bracket, there are three different tax breaks which make pensions the best and most efficient for of long term savings.
This is an opinion only and does not constitute advice as individual circumstances will determine all financial advise given.