Why you should maximise your employee pension scheme

The benefits of an employee pension scheme

Pensions are extremely important and should be considered by working people of all ages especially those who have just started working. The following article outlines why you should be maximising your pension contributions:

Do you want to be rich in retirement?

If you ever want to retire on a reasonable income then you need to ensure that you have a large portfolio of assets from which to live off. Included within this should be a pension pot.

Many do not realise that you need a large pension pot if you want to live a comfortable existence in retirement. The average UK pension pot upon retirement in 2015 was only £40,000. Given that a pension pot of £1million will provide an annual income of about £27,000 at today's interest rates - hardly worth shouting about. The resulting conclusion is that not only will you need to have other assets in the mix to rely on in retirement but you'll also need a sizeable pot!

It is estimated that in order to sustain your current living standard on into retirement then you need to contribute 15%-20% of your gross income each year of working into your pension pot. This means that 90%+ of the U.K. population are not putting enough into their pension.

Understandably most people may feel that they cannot afford to put 15% of their incomes into a pension scheme. However, I'd point out that the government is mandating that all Companies with at least one employee must offer a pension scheme. Many Companies match the contributions of their employees as part of employee benefits package. To gain from the Company contribution matching scheme then employees need to sign up to the amount they'd like to commit to contributing to their pension. The default position is unlikely to be any more than 1% contributions. However most Companies offer far more. I recommend that you make enquiries as to how much your employer is willing to match and then max out this scheme. 

Why you should contribute to your company pension scheme

As an example, if your Company offers up to 5% pension matching then you should contribute the full 5% and gain the Companies 5% matched amount on top. Added to this the tax man gives you the tax back on any income that you decide to contribute into a pension. So if you are earning £20,000 per year the you should be willing to contribute 5% of your income into your pension. This will cost you £1,000 per year. This works out at only £84 per month. Your firm will then match your contributions to the tune of £84. Then the government will top up the pension with the amount of £21 (20% of your contributed amount). So for the sacrifice of £84 of money today you get to contribute almost £190 into your retirement pot each and every month. That's £106 free money every month. That's free money people! Wake up! If you're not maxing out your Company's pension scheme then you are effectively turning away free money in the future!

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