Many of us put off saving into a pension, particularly when living costs are spiralling and making it tougher than ever to save for the future.
However, even if you’re in your 50s or 60s, it’s not too late to start saving into a pension for the first time. You may still be working and saving for years to come, and could benefit from long-term returns to increase your retirement pot. There are also particular advantages to saving into a pension and rules that could boost the amount you save at this stage of life.
Here, we explain why it’s never too late to start saving into a pension, as even putting away a small amount each month can make a big difference over time.
1. You may benefit from employer contributions
You may find that you have access to a workplace pension scheme, which makes it easy to start paying into a pension. For example, if you’ve been self-employed for your working life and become an employee, your employer is obliged to pay into a pension on your behalf under the government’s auto-enrolment scheme. The minimum total contribution into your workplace pension is 8% of your pay, no matter your age. You’ll usually pay in 5% of your salary before tax (of which 1% is tax relief), while your employer will contribute in 3%, bringing the total to 8% of salary. Read more in our guide How does pension auto-enrolment work?
You may find that your employer will pay in more than the minimum contribution, and that you can also contribute more if you want, if this is affordable for you. You can also make additional one-off voluntary contributions into a workplace pension at any time.
If you work part-time, and earn less than £10,000 a year (the threshold for auto-enrolment) you can still ask your employer if you can join the company scheme and they can’t refuse. However, bear in mind that if you earn less than £520 a month, or £120 a week, your employer doesn’t have to contribute to your pension. Read more in our article Can I join my workplace pension scheme if I’m on a low salary.
2. You may be able to use pension carry forward
You might be able to benefit from pension carry forward rules to boost your retirement pot. These rules allow you to make use of any of your unused Annual Allowance from the previous three tax years, and receive tax relief on this sum. Carry forward can be particularly useful if you’re self-employed and your income varies each year, for example, or you’re looking to make a single, large pension contribution.
After all, most of us don’t contribute our full £60,000 Annual Allowance to our pension each year (or all of our earnings), giving us allowance to use over following years, if we wish. You might have some money to spare that could be paid into your pension if, for example, you have come into a lump sum through an inheritance or work bonus.
It is important to remember, however, that you cannot receive tax relief on contributions in excess of your earnings in any tax year, even using the pension carry forward rule. For example, if you earn £50,000 in a tax year, you can only contribute up to £50,000 to your pension that year, including any carried forward allowance.
You do not need to report additional contributions under carry forward to HMRC, provided you qualify to use this rule, and haven’t exceeded your Annual Allowance. Read more about how pension carry forward works in our article Pension carry forward explained.
3. Even small amounts are worth saving
When working out how much you should be saving towards retirement, the traditional rule of thumb is to take your age, halve it, and then pay this percentage of your salary into your pension every month. This amounts to 25% of your earnings as a 50-year-old. If you’re earning £2,000 a month, that means you should ideally aim to pay £500 of this into your pension, but this is clearly unachievable for many people, particularly when living costs are soaring.
However, any amount that you can pay into a pension will receive tax relief (see below), up to your £60,000 Annual Allowance. Read more about pension allowances in our article Understanding your pension allowances. Even contributing small amounts each month can make a difference to your retirement pot, because of the effect of your returns generating more returns (known as compounding). The longer the money remains invested into retirement, the greater the impact on your pension pot.
Based on the Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards, you’d need an income of £12,800 a year to achieve a minimum standard of living in retirement. This should be enough to cover all your basic needs, with a little bit of spare cash left over. Remember this is the total including your State Pension, which is £10,600 in the 2022/23 tax year. Find out more in our article How much should I save for retirement?
4. You’ll benefit from tax relief
One of the biggest benefits of saving into a pension is that you receive tax relief on the contributions you make. For example, if you’re a basic rate taxpayer a £100 contribution into your pension will only cost you £80 thanks to tax relief. If you’re a higher rate taxpayer the same contribution will only set you back £60.
If you’re in your 50s or 60s it could be even more worthwhile paying into a pension if you’re looking ahead to retirement, as you’ll still qualify for tax relief on your contributions up to the age of 75 and you’ll also be able to access your pension savings (including the top up from the taxman) much sooner than someone younger. Read more in our guide How pension tax relief works.
Even if you’re not earning enough to pay income tax, you can still get basic rate tax relief on pension contributions of up to £2,880 each year. If you’re not working, your partner might decide to make pension contributions on your behalf until you find a new job. You can find out more about this in our article Can my husband or wife pay into my pension?
Types of personal pension include Self-Invested Personal Pensions (SIPPs) which usually suit confident investors who are comfortable choosing and managing their pension investments themselves. There are also Stakeholder Pensions, which allow you to make small contributions starting from £20 a month, and to stop and start these if you need to. Your money is usually invested in a default fund, unless you request otherwise. Read more in our article What are the different types of pension?
5. You can leave your pension savings invested whilst drawing an income from them
Following the introduction of pension freedoms in April 2015, you can do as you wish with your defined contribution pension at retirement.
Many people choose flexible drawdown as a way of taking an income from their pension as and when they need it, while the remainder of their pot remains invested, giving it the chance to continue growing (although of course there’s a risk that it may not). This means that even if you start saving into a pension later in life, you may still be invested for a long period of time. As explained, the impact of remaining invested and compounding can make a big difference to the amount you have saved in retirement.
Read more in our article What is pension drawdown and how does it work?
Where to go for advice on your pension
If you’re 50 or over, you can get free guidance on the options available to you from the Government’s Pension Wise service.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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