A pension is an investment vehicle designed specifically for retirement. It holds a number of key benefits for saving and investing for the long term vs a traditional savings account.
Investing the money - Over a long time period, looking at historical data, well diversified investments always increase in value. It is important that your money set aside grows in excess of inflation, so that in retirement, as a minimum, it has the same purchasing power as today.
Tax Relief on contributions - Money contributed into a pension is given tax relief at your marginal rate of tax by the UK government. For example, if you are a basic rate tax payer, paying tax at 20%, for every £100 that goes into your pension, it will cost you just £80. If you happen to be a higher or additional rate tax payer, the same rule applies, and your net cost would be £60 or £55 respectively in this example.
Investments inside a pension grow tax free - If you invest money in a standard personal account, you will liable to pay tax on the income and capital gains that this achieves. Inside a pension, no tax is applied on any income or growth!
IHT Protected for beneficiaries - Although horrible to think about, when you pass away your estate may well be exposed to Inheritance Tax (IHT). This is applied at a rate of 40% for all of your estate which is above your Nil Rate Band, which currently stands at £325,000. Any funds within a pension are not considered to be a part of your estate, and thus is fully protected from IHT!
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