Cut down on debt, reduce short term loans and put money in a pension

Tired of short term loans, payday loans, credit card debt? Fed up with being in debt and always having to borrow money? You are not alone. According to recent statistics from the charity Stepchange 66,557 people are currently battling debt in the UK and asking for their help.

If you are battling debt it would seem unusual to think of paying extra into a pension but according to all you have to do is to start a pension and you will have an “easy pay rise”. The government will participate in your pension and if you are still employed your employer may be forced to contribute towards your pension.

What should I know about pensions in the UK?

  • Pensions are not only for the elderly

A pension is not necessarily only for the elderly. A private pension is simply an investment which is tax-free. Your employer and at times the government will contribute towards your pension. It is a means of saving for retirement. Once you have retired you will be able to draw from the pension or you will be able to sell the cash to an insurance company which will give a regular income until your death. This is called an annuity.

With extra cash being put into your pension your overall income will actually rise. Of course you will not be able to go on a spending spree with the extra money but it is being save towards the day when you are no longer working. You will end up with less disposable income but even if retirement seems like light-years away it comes towards you more quickly than you realise!

  • Auto-Enrolment and how it affects you

Many employers are now forced to offer pensions and this is called auto-enrolment. This has been designed to take care of the chronic lack of retirement savings. Currently fewer than one in three adults in the UK are paying into a pension scheme. With so many people in debt, rolling over short term loans, buying on credit cards and paying off mortgages it is more and more difficult for people to contribute to a pension scheme so this is one way the government is trying to assist.

  • What are the benefits of contributing?

The biggest benefit is tax relief; you get tax back when you put the money into your pension and the gains from the investments you make are mostly tax free.There are two limits to tax relief; tax relief is given on contributions up to annual earnings. Another tax limit is applied to high earners. It is also possible to only get tax relief up to your current annual allowance which is made up of the current year’s allowance from previous three tax years.

How much money should I place in a pension scheme?

The best advice is to put as much as you possibly can into your pension pot. Under auto-enrolment there is a minimum amount you have to contribute but try to put in more.

If you are drowning in debt, if you are rolling over short term loans, if you are up to your ears in credit card debt it would be wise to pay of your debts before putting more than necessary into your pension pot. After all, debt costs and it is better to be debt free before saving.