What happens to my money when I pay into my pension every month ?
Nearly everyone will pay into some sort of pension at some stage, or indeed throughout their working life. These are often through their employer, set up by an individual independently or through a financial adviser.
Most will go through life paying into their pension every month, without giving much thought as to what is happening to the funds they are paying in. It becomes habit, you don’t notice the contribution leaving your pay cheque every month and so you don’t think about what actually happens to your money once it enters your pension. Life gets in the way, there are always more important and more immediate issues that you have to attend to. The pension is something you’ll worry about later.
As you may have gathered, we would suggest that you look at it now. Your pension will offer you an array of benefits that you may not even be aware of, which are being wasted without your care and attention. Some examples are:
- Income Tax Relief – this is especially pertinent to Higher Income taxpayers. According to research by Prudential, nearly 60% of higher rate taxpayers fail to claim full income tax relief on their pension contributions.
- Tax efficient growth – the funds within your pension grow free from income and capital gains taxes. This can have a considerable compound effect over the many years that you hold it.
- Access to stock market-based investments for long-term growth. Most pensions will
automatically invest you into a ‘default investment fund’, this may not be the most effective fund that is available within your pension but should still provide better potential long-term growth prospects than many other savings vehicles.
- Free of Inheritance Tax – nearly all pensions do not form part of your Estate and are therefore free of inheritance tax liability.
These are a few headline advantages of holding a pension, however there are of course drawbacks. This could be access (you can normally only access your private pension from age 55), affordability, Lifetime Allowance (you are limited as to how much you can hold in your pensions before suffering a tax charge) and others that may be specific to you as an individual.
The overall idea is that your money will be given the best chance to grow to a level that you might feel comfortable to live on in the future. Considering how crucial pensions will become to many of us in later life, it might be worth just thinking about what you currently do with yours.
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