Pension: Britons could secure a £1million pension pot – even amid inflation | Personal Finance | Finance
Many Britons are currently worried about the cost of living in the present, and it could dissuade them from putting money away for the future. However, saving into a pension is often considered to be better than cash savings which are currently being ravaged by inflationary pressures.
Pension saving has been described by experts as coming with a “gift of free cash” from the Government in the form of tax relief.
It is this element which means pensions not only usually keep pace with inflation, but can sometimes also beat it.
Tax relief boosts a pension by 25 percent, while higher rate taxpayers are effectively securing a 66.7 percent boost from tax relief, before investment growth is taken into account.
Gary Smith, Director of Financial Planning at the Newcastle branch of Evelyn Partners, provided further insight into the matter.
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Mr Smith stressed achieving this goal does not have to mean earning a signified amount, or saving a huge percentage of one’s pay.
This is because of the power of compound returns, which help money saved to snowball over time.
Of course, the earlier a person starts on this journey, the easier they are likely to find the process.
However, it is never too late to pick up the slack in the hopes of boosting one’s pot.
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Mr Smith added: “A young professional with salary progression through their career lifetime, who saves just five percent of their gross pay into a pension to start off with, will be setting themselves up to quite possibly break the £1 million barrier.”
Breaching the £1million pension barrier is a lofty achievement, however, as savings grow people should be aware of potential implications.
Perhaps most important is the Lifetime Allowance which limits how much a person can save without paying a hefty tax.
The current Lifetime Allowance is £1,073,100 and is frozen at this level until 2026.
Mr Smith continued: “It’s by no means cut and dried that savers should avoid breaching the LPA, as it will depend on one’s financial situation, including plans for retirement and tax-efficient gifting.
“However, middle and high earners who have been diligently saving into a pension for most of their career must be aware of the LPA and that it could come into play – and sooner than they might expect.”
According to the expert, this should not put Britons off saving for their future and the retirement they are hoping for.
Judgments as to whether to continue growing a pension pot beyond the LPA can be made as the limit is approached.
This is because any tax charges due will only be levied once the pension is crystallised.
