As part of our finances for the future series, we asked leading experts your pension related questions. We found that lots of you didn’t have a clue about pensions. Well we want to bring the experts to you to help. One of the questions that we were asked was, why not just stash some cash away for old age?
It used to be that many people would stash some cash away somewhere – under the mattress or floor boards. Who knows why; probably they didn’t trust banks or the they didn’t have a bank account. Whatever the reason, it’s not a good idea for many reasons, the possibility of someone stealing it being only one.
We asked investment consultant Freddie Ewer to explain to us why simply stashing some cash away for retirement wasn’t the best plan.
Pension schemes have a number of advantages to them. First of all, when you pay into a pension, your employer also pays into this, matching your contribution, which is essentially free cash which wouldn’t be available if you just put some money aside for example in a savings account.
There are also tax advantages to saving into a pension. Your contributions and also the contribution that your employer makes are subject to tax relief. If you are paying into a workplace pension then your employer takes your pension contribution before your tax is deducted which reduces the overall amount of your salary therefore reducing the overall tax that is taken.
If you were to make use of a savings account, such as an ISA then the money that you pay into this is paid in after you have been taxed (it comes out of your net salary) and so you have already paid tax on this money. The tax relief on pensions however means that the savings that you make are greater than if you just put your money into a savings account.
- You get some additional money from your employer with a work place pension.
- Your pension payments are taken before you are taxed, so you save this way.
If you found this article useful, why not read Freddie’s top tips for saving? as well as other helpful stuff on pensions in our advice section.