How much does it cost to save into a pension?

Setting aside more money for your future may seem a big ask, yet paying into a pension could cost far less than you think.

Read on to find out how much it really costs to save into a pension, and what else to consider when you’re deciding on the best home for your savings.

How do pension contributions work?

Each time you pay into a pension, you’re entitled to receive tax relief.

Tax relief is essentially free money from the government, but not many people understand how it works. When we asked 1,000 higher-rate taxpayers how much it would cost to put £1 in their pension, only 23% gave the correct answer – which is 60p¹.

The other 40p comes from the government because higher-rate taxpayers are entitled to 40% tax relief on personal pension contributions (42% if you live in Scotland).

If you’re a basic-rate taxpayer, you’ll receive 20% tax relief, so a £1 personal pension contribution would cost you 80p.

Even if you don’t pay income tax, if you’re under 75 you’ll still get 20% tax relief on the first £2,880 you pay into a pension each tax year.

How do I get pension tax relief?

If you’re in a workplace pension scheme and your pension contributions are deducted from your pay before income tax, this reduces your tax bill and means you get your full tax relief there and then.

Personal pensions work a bit differently. Most providers will claim 20% tax relief on your behalf and add it to your pension pot. If you’re a higher-rate taxpayer, you’ll then need to claim the additional 20% tax relief yourself. You can do this through a self-assessment tax return or by calling or writing to HMRC.

Are there any limits?

You can get tax relief on pension contributions worth up to 100% of your UK relevant earnings or £60,000, whichever is lower. If you exceed this amount, you’ll have to pay a tax charge. Your pension annual allowance might be lower if your ‘adjusted income’ exceeds £260,000.

Is a pension the best place for my savings?

The tax relief you get on personal pension contributions can help to supercharge how much money you have at retirement. However, this is just one factor to consider when deciding where to save your money.

You can’t withdraw money from pensions until you reach age 55 (57 from April 2028), so you need to be confident you won’t need the money before that date.

If you’re saving for pre-retirement goals, such as paying for your child’s university fees or buying a bigger house, you might want to consider investing in an ISA. You don’t get tax relief on contributions, but your money can grow free of tax and you can withdraw it whenever you like, tax free. You can find out more about the differences between ISAs and pensions here.

Next steps

If you’re unsure whether a pension is right for you, speak to a financial adviser. By understanding you, your financial circumstances and your goals, they’ll be able to advise on the best place for your money, so you can feel confident you’ve made the right decision for you. For smart advice that’s tailored to you, speak to one of our advisers today.

¹ Find Out Now survey of 1,006 higher-rate taxpayers, 30 June to 1 July 2022.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.