Why you need a pension to avoid 'retirement regret'

Pensions may sound complicated but failing to put money into one could lead to "retirement regret".

Aiming to save half your age as a percentage of your salary in a pension can put you on "solid ground" for a "regret-less retirement", said Pension Awareness in a campaign running this week to promote the importance of saving for your golden years.

A pension is a "tax-efficient way" of saving for your retirement, explained Legal & General.

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But the issue is that "millions of people aren't saving nearly enough" into their pensions, said MoneyHelper, meaning they may struggle for the "standard of living" they hope for when they retire.

Funding your golden years

While the state pension offers Britons a set amount of money per year after they reach state pension age – currently 66 – this sum only covers "basic needs", said Citizens Advice.

As a result, it is "a good idea" to put some extra money aside to secure a "decent standard of living".

Data from the Pension and Lifetime Savings Association (PLSA) shows individuals need £43,000 per year for a comfortable standard of living in retirement.

The state pension, currently at £11,502 per year, won't cover all of that, said Armstrong Watson, "therefore there is a shortfall".

You could have more than 20 years in retirement, added the advisory firm, so "you will need an income to fund that".

Tax efficiency

There are a few tax benefits to putting money into a pension.

There is no tax to pay on any investment growth, plus a "big benefit", said MoneySavingExpert, is that you get tax relief on contributions.

For example, a basic-rate taxpayer gets 20% tax back from the government automatically as an additional deposit into their pension, while higher and additional-rate taxpayers can claim an additional 20% or 25% respectively through a tax return.

Paying into a pension could be tax efficient if your salary and/or bonus means "you cross into a higher tax band", said Brewin Dolphin, as it could lower your adjusted net income below higher rate thresholds.

You can access your pension from age 55 but you "may be puzzled" said Unbiased, that you have to pay income tax on withdrawals.

The "good news" is that you can take 25% tax-free, but it is important to take advice, "so you can avoid a huge tax bill".

'Free money' 

Most employed people are automatically enrolled into workplace pensions.

The minimum contribution under auto-enrolment is 8% of an employee's earnings, with at least 3% coming from the employer.

Your employer will put money in "regardless of whether you pay into it", added MoneyHelper.

The money comes in "each pay period", and is topped up by your employer and government, said The People’s Pension. 

When you pay into it, your employer usually does too and the government, providing "free 'extra' money" that means "more saved towards a more comfortable retirement".