It’s investment time! Traditionally the period before the end of the tax year at the beginning of April is the season for everyone to top up their annual tax-free allowances. But with the stock market in the doldrums (guess why, begins with B) the prospect of shares isn’t very enticing. Wouldn’t it be nice if someone took the guesswork out of it and just gave you 20% or even 40% back on your money?
Funnily enough, that’s exactly what happens when you save into a pension. The government gives you the tax back on money you put aside for retirement. As a higher-rate taxpayer, that’s a whole 40% return on your cash before any investment growth. Nor do basic-rate taxpayers miss out. They get 20% back on money in a pension. You don’t even have to be working to get the retirement top-up. If you’re earning less than £3,600 a year (or nothing) you can still save up to £2,880 and get tax back of up to £720 annually. Even children can use this allowance!
It’s not all plain sailing as there are various limits on how much you can save – lifetime and yearly – that kick in. And of course three-quarters of the pension money could be taxed when you withdraw it, provided you’ve managed to save enough to have an annual income in retirement which is greater than the personal tax allowance (currently £12,500). Who doesn’t want to be comfortable in old age? It’s so important to see through the jargon and the eye-crossingly dull paperwork. Pension tax relief is a real boost to savings and all skinted and minted mums should try to get their hands on as much of it as they can manage.
Another way to free money is through a workplace pension scheme. Many employers give healthy contributions to their staff as part of a salary package. If you’re eligible to join, it’s most definitely worth signing up. The only downer is that you’ll probably have to make some savings yourself to qualify for the handouts but it will be worth it in the end.
I’m a huge fan of regular saving, either into pensions or into shares through investment funds or Isas. The earlier you start, the better. Small amounts really do add up over the long term, especially when they’re compounded with investment growth (including reinvesting annual dividends). You can start from as low as £25 a month. Saving a fixed amount regularly also means you automatically buy more stocks and shares when the price is lower and less when they are higher – a smart strategy.
There will be ups and downs in the value of your pension or investment: that is the nature of the stock market. The longer you can invest for however, the more these swings even out. It’s silly to ignore free money. In these cold, dark evenings, have a look to see what you could do for a sunnier retirement. Check out our SMM guides to pensions too and our tips for finding a financial adviser if you need more help.