Pensions: The easiest pay rise you’ll ever get

🔸 Plus: “Predatory marriage” 🔸 British nightclubs are dying 🔸 Analysts punish stocks more when the CEO is female 🔸

Jan 13, 2025

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(As of Friday market close.)

Pensions: The easiest pay rise you can ever give yourself

At Moneyin2 we have mentioned before that the single most lucrative thing you can do with your money is to enroll in your employer’s pension plan. (Or, if you are self-employed, open your own Self Invested Pension Plan (SIPP) which basically does the same thing.)

But Moneyin2 has never done a simple, plain-English explainer of why a workplace pension is such a big deal.

And why not using one is dumb.

So, here goes!

First, some context. Alarmingly few Brits take advantage of their employer’s pension plans. Although 80% of workers have one from a current or previous job, only 6.8 million people actually contributed to their pension in the most recent tax year. And that’s a decline from 7.4 million the year before.

That means a lot of people are missing out on the best free-money scheme available

The basics: a pension is essentially a savings account where you and your employer contribute money, and you get tax relief (free money) on those contributions. When you reach retirement, you can either take the money out — including any investment gains you have made — usually at a lower rate of tax. The first 25% of your money is tax-free, for instance.

So a pension generates free cash for you in three ways:

You don’t pay tax on money you pay into the pension or SIPP.
Your employer will give you a 3% match on your money, by law, that you otherwise would not get in your paycheck. (You don’t get this in a SIPP.)
The savings and investments in your pension will likely grow and make gains that are not immediately subject to tax.

There is only one downside to a pension or SIPP. If you want to take cash out of it before you are 55, then the government will charge a 55% tax. Ouch. Your investment gains might still put you ahead even if you want to do this. But clearly the entire intent of the pension/SIPP scheme is to incentivise you to save and invest for your future retired self. It’s a long-term play.

Tax relief: One of the biggest perks of paying into a pension is the tax relief. For every £80 you pay into your pension, the government tops you up with another £20. That’s an immediate 25% gain on your money (20/80=25%).

How much you should save: Martin Lewis, the personal finance celebrity, recommends a rule of thumb:

Save a percentage of your salary equal to half your age when you start saving. So, if you start saving at 32, you should aim for 16% of your salary each year.

The purpose of the rule is to underline the fact that the later you leave it, the harder it will be to catch up with the gains you missed if you had started saving in your 20s.

There are limits. If you earn a lot of money the tax relief disappears. But if you’re hitting those limits you have high-class problems so we’re going to skip over them for now.

Salary sacrifice: Some employers offer a benefit where you agree to give up part of your pre-tax salary in exchange for a pension contribution. This means the money goes straight into your pension before tax, so you save on income tax and National Insurance. If you're a basic-rate taxpayer, for example, sacrificing £72 of your salary would result in £100 going into your pension.

Again, it’s free money. It’s how smart people get rich slowly.

If you want more details, click on the Moneyin2 Guide to Wealth, below.

The Moneyin2 Guide to Wealth

The Moneyin2 Guide to Wealth will get you the biggest return on your savings by maximising cash matches from your employer, free cash from the government, and shielding your investment gains from tax. It takes you step-by-step through the world of pensions, SIPPs, ISAs and ETFs — all in plain English.

And for dessert …

Beware “predatory marriage”: A new phenom that results in gains for scammers even if they are caught. The elderly are targeted, sometimes by their carers, for very late-life marriage. The target — who may have dementia — then changes his or her will to benefit the new spouse, not the children. The children can challenge the will in court but if successful a judge will rule that the deceased died without a will and distribute the estate according to the standard formula — in which the widow or widower gets the lion’s share.
Rich people are increasingly turning to private arbitration for their divorces instead of going through the courts.
Analysts listening to earnings calls punish stocks more if the CEO is female than if male, a study shows.
British nightclubs are dying. The Night Time Industries Association (NTIA) says there has been a 32.7 per cent decline in activity since 2020.

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