A pension is a tax-efficient way to save for your retirement, or for later life when you are no longer able to earn. At the point of retirement you will be able to access these savings and choose how to take out your money. This may be as an annuity, drawdown, or as cash if your pot is under a certain size. The 2014 Budget proposed substantial changes to the way you can take your money from defined contribution pensions in retirement. If you choose to buy an annuity, you will be paid an income for the rest of your life when you choose to retire.
Reasons to think about a pension
When you reach State Pension Age you will get a regular payment from the government; this is called the State Pension. If you want to have more money in your retirement than the State Pension provides, or you want to retire before the age at which you are entitled to receive the State Pension, it is a good idea to save into a pension to build your own retirement income.
The amount your pension will be worth at retirement depends on how much you save, so it is important to save while you are earning, and to contribute to your pension on a regular basis throughout your working life.
The government also encourages you to save into a pension by giving you tax relief on your pension savings. For example, if you are a basic rate tax payer, or do not earn at all, for every £80 you save into your pension, the government will top this up by £20.
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