How to make pension contributions and are they worth it?

Planning for retirement is one of the most important steps you can take to secure your financial future. But if the thought of pensions and retirement planning feels overwhelming, don’t worry—you’re not alone. Whether you’re an employee enrolled in PAYE, a small business owner, or self-employed, pension contributions are a critical piece of the puzzle. This guide will explain why pensions are worth your attention, how contributions work, and how tax benefits can make them one of the smartest financial moves today.What is a pension, and why should you contribute?A pension is essentially a long-term savings plan specifically designed to fund your retirement. The main advantage of pensions? They come with significant perks that make them more efficient than other types of savings plans. Tax Relief One of the standout benefits of pensions is the tax relief you receive on contributions. This means that for every pound you save into your pension, the government adds extra, boosting your pot. For basic-rate taxpayers, a £100 contribution only costs you £80; higher-rate taxpayers see even greater savings.Employer Contributions If you’re employed, another big win comes from workplace pensions. Your employer typically matches your contributions up to a certain percentage—a benefit no saver should overlook.Long-term growth Pensions allow your money to grow tax-free over decades. With compound growth—the interest earned on both your savings and previous interest—starting early can significantly increase the size of your retirement pot.How do business owners benefit from pension contributions?If you’re a small business owner or company director, pensions shouldn’t just be an afterthought—they can be a highly efficient way to manage your personal and company finances. Tax Efficiency for Businesses Contributions made to your pension by your business are considered an allowable expense. This means they can be deducted from your profits before corporation tax is applied. For example, a £10,000 company pension contribution could save up to £2,500 in tax (based on the 25% corporation tax rate for 2024/25).National Insurance Reductions Strategic pension contributions can also reduce National Insurance costs for directors. By taking a lower salary and making higher pension contributions, business owners can further decrease their tax and NI liabilities.Contribution Limits Business owners can contribute up to the annual allowance of £60,000 tax-free (as of the 2024/25 tax year), adjusted for income. Be mindful of the “carry forward” rule, which allows you to use any unused allowance from the past three years.The combination of reduced tax liability and long-term financial security makes pension contributions a win-win for business owners.Why should employees prioritise their pensions?For employees, adding to a workplace pension scheme is one of the simplest ways to save for the future. Auto-enrolment legislation requires most employers to provide pension schemes, ensuring that millions of UK workers already have this safety net. But why should you be proactive about contributions instead of relying solely on the minimum?Employer Matching Many employers will match the contributions you make, effectively doubling your saving power. For example, if you allocate 5% of your salary, your employer might add another 5%—free money towards your retirement!Tax Savings Made Easy Your contributions are made from pre-tax income, meaning you also pay less in income tax. For higher-rate taxpayers, the savings are even more significant, making pensions the single most tax-efficient way to allocate extra income today.Is the State Pension enough?The state pension offers some financial support in retirement, but relying solely on it could leave you short. The full state pension for 2023/24 is £203.85 per week, but eligibility depends on your National Insurance record. For many, this will not be sufficient to maintain their desired lifestyle after retirement. Private pensions help fill in the gaps, offering flexibility, better growth prospects, and higher income potential than the state pension alone.How can the self-employed save for retirement?For self-employed workers, there’s no auto-enrolment to fall back on. However, setting up a private pension should remain a priority, and there are tailored options specifically designed for sole traders and freelancers.Self-Invested Personal Pensions (SIPPs) SIPPs give you full control over your investments, allowing you to choose where your money is invested, whether that’s stocks, funds, or property. This flexibility is ideal for the self-employed who want to be more hands-on with their pension savings.Stakeholder Pensions For those who prefer simplicity, stakeholder pensions offer a straightforward way to contribute regularly to a private scheme with capped fees.Both options allow you to benefit from the same tax relief as employees, making them smart tools for retirement planning.How can you get started with pension contributions?Getting started doesn’t have to feel complicated. For employees, workplace pension schemes are managed by employers, simplifying the process. Small business owners or the self-employed might look at opening a private pension with trusted providers like Nest, Hargreaves Lansdown, or PensionBee. Make use of online tools, such as the government's pension calculator, to estimate future savings and understand how much you should contribute now. For bespoke advice, consider consulting a financial advisor to tailor a plan to your personal circumstances.Are pension contributions really worth it?Absolutely. Whether you’re employed, self-employed, or running a business, the combination of tax relief, employer contributions, and long-term growth make pensions one of the most efficient ways to save for retirement. Start early, contribute regularly, and take advantage of the financial incentives available to you. By making pension contributions a priority now, you’ll thank yourself when it’s time to retire.At Virtue Accountants, we’re here to make financial planning simple. From managing PAYE to optimising your contributions, our team is happy to help. Contact us today to learn more about how we can support your pension and retirement planning goals.