Pensions for Basic Rate Taxpayers

Pensions for Basic Rate Taxpayers

by Rebecca Hall on 6 Jul, 2011

We all know we should be paying into a pension, particularly in light of rising life expectancies with only a pittance of a state pension to look forward to. But for those of us earning below the 40% tax bracket, it can be incredibly difficult to find the cash to put away. It’s much easier to just forget about saving for retirement and concentrate on the now. However, with a state pension currently looking at providing around £7,000 per year and even a £100,000 pension pot only providing £6,000 annually (for a man retiring at 65), the earlier you can start saving, the better.

Personal pensions are clearly the best option for higher rate taxpayers who can afford to lose more in charges but make up a lot more in tax relief (any contributions you make receive tax relief – meaning higher rate tax payers receive a 40% top up on any contributions they make, which then grow tax free themselves). However, being unable to access your money until you hit 55 is not a very appealing option for most of us, and the extra risks associated with this type of more active investment may not be suitable.

Stakeholder pensions are much simpler and cheaper, although are likely to reap lesser rewards. And again, the money is locked up until you’re 55 (although that’s not necessarily a bad thing).

For ultimate flexibility and perhaps the greatest rewards (given enough attention), it’s worth considering saving for retirement in ways other than pension funds, which aren’t necessarily the best way of tying up your money. Investing the full amount in a cash ISA every year will yield substantial dividends as will other long term savings options. Those with a taste for a little more risk might consider investing in a stocks and shares ISA which although comes with the associated potential pitfalls of investment, could yield a much greater retirement pot.

Whatever you decide to do, you can never start too early. Final salary pensions which paid out based upon your salary when you retired, are becoming a thing of the past, despite having previously contributed up to two thirds of retirement income. Take a look at the best options for long term saving and how you can make the most out of your money.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.