Lowes Magazine Issue 119

PENSIONS

The power of knowledge

A PRIMARY BENEFIT OF A PENSION IS THE TAX relief received when contributing to it – set at the highest marginal rate of tax of the individual – with the maximum tax relievable contribution being the lower of 100% of relevant earnings during the tax year, or £40,000 (2021/2022 tax year). So, currently, if an ordinary rate taxpayer pays £80 into their pension they will receive £20 tax relief, a 25% uplift. Yet, when research company Opinium carried out a survey among 2,000 UK adults on behalf of mutual assurer Royal London, they found that 27% of people admitted they had never heard of the benefits of tax relief in respect of pension saving. Of those that had heard of it, just 15% of those surveyed said they fully understood how tax relief on pension contributions works, while a further 31% said they had some understanding. The remaining 27% said they had heard of pensions tax relief but did not know how it worked. If we take this as a representative sample of the UK population, it is clear that the messages around pensions benefits – not just the tax relief but creating a long-term savings habit for which our future selves will thank us – need to be spread far and wide. There are other good reasons to save through a pension too. When the Pensions Freedoms were introduced in 2015, they changed the available death benefits, allowing pensions to be passed on to named beneficiaries outside of the estate for inheritance tax purposes, and for income to be drawn by the beneficiaries free of income tax or at their marginal rate, depending on set criteria. Once people have a better understanding of how pensions tax relief works, and all the other benefits, our experience is that they will view pensions more positively and contribute more towards their pensions over time. Likewise, we urge anyone whose employer has a workplace pension to which the employer makes a contribution to take advantage of it.

There are many personal pensions to choose from and many investments within those pensions – a pension is a tax wrapper, what you invest in within it typically is determined by the range of investments offered by the pension provider. Alternatively, Self Invested Personal Pensions (SIPPs) are pension wrappers where, as the name suggests, the individual can select the investment they want to put in the pension wrapper. Typically SIPPs are advised on by Independent Financial Advisers who have the knowledge and access to the universe of investment products.

Reviewing our pensions Lowes Consultant Jennifer Morris says: Once set up, pensions can often

be overlooked. Payments go in and an annual statement is received. But pensions should be constantly monitored and the annual statement should be used as a prompt to do so. Ideally, a pension where contributions rise, at least with inflation, should be used but this does not mean contributions should not be increased further wherever possible. In particular, parents should consider paying more into their pension pots when their children have left home. At this point in their lives many people are earning more, they may have paid off or be close to paying off their mortgage, have less overheads and so should be better off financially. The rewards of paying more into a pension at this point can be reaped in a better standard of living in retirement or potentially, retiring earlier than expected, while also not substantially affecting their current standard of living.

7 Lowes.co.uk