In this short guide, we answer a question individuals often ask; ‘should I invest in a pension?’ Historically, pensions have been a staple of retirement planning as they help provide income in later life. This is still true today.

Pensions can be a crucial part of ensuring you don’t leave yourself high and dry when you retire.

There are many benefits to paying into a pension. Pensions are incredibly tax-efficient, and the government tops up your contributions. You can receive tax relief on your pension contributions at a rate of 20%, 40% or 45% (more on tax relief later).

That’s right, you invest towards retirement and the government tops up your investment.

What other investments offer you that?

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Should you invest in a pension?

There are many reasons to invest in a pension. They include:

  • Later life income – securing your finances for when you retire
  • Tax  & Government contributions– in addition to your investment, the government contributes to your pension at your prevailing tax rate
  • Tax planning for business owners – business owners who use company cash to invest in a pension, are offered corporation tax advantages
  • Retirement planning – pensions are often critical to a financially stable retirement. Start investing early

Let’s take a look at each area.

Securing later life income 

Planning for retirement may feel daunting. The prospect of running out of money, is even more so.

By investing in a pension you are locking away money for your future.

When you retire, you can take out an annuity when you reach the age you wish to retire. An annuity can pay you an agreed income until you pass away.

If you would like to know more about annuities, read this article by Which?: What is an annuity?

Tax relief & Government pension contributions

When you invest in a pension, the government makes a contribution.

This callled tax-reilef.

What are the different types of tax relief?

There are two ways you get tax relief on your pension contributions. They are known as:

  • Relief at source
  • Net pay

Relief at source

Relief at source, means your pension contributions receive a boost from the government. Additionally, you can potentially claim more back via your tax return. This applies if you pay tax above the basic rate.

Net pay

With net pay, your pension contributions are made prior to you being taxed. This will result in you usually paying less tax. This is because your tax will be calculated based on a lower amount of UK earnings.

For more information on relief at source and net pay tax relief, visit this helpful article on Money Helper: Tax relief on pension contributions

Tax planning for business owners 

If you own a limited company, pensions offer fantastic tax incentives. Pension contributions can be treated as an allowable business expense.

These pension contributions can be offset against your company’s corporation tax bill.

If a business owner is planning to sell their business to fund their retirement, making the most of pension allowances is a wise choice.


It can help reduce Capital Gains Tax (CGT) when your company is sold.

Therefore, pensions help to reduce corporation tax, and CGT when a business is sold.

Retirement planning

Earlier in this blog, we highlighted how pensions help to secure income in later life.

When it comes to retirement planning, it is all about the lifestyle, and level of income you want in later life.

Will you be looking to downsize your property?

How about a place in the sun?

What will you be able to afford if you keep saving and spending at the current rate?

Pension form a crucial role in this process. Whilst you cannot guarantee a return, government contributions, tax relief, and the ability to squirrel money away for the long term make pensions an important part of the retirement planning process.

Related reading: 10 retirement planning tips: How to plan & save for a happy retirement.

Note: This article doesn’t constitute financial advice. Your capital is at risk when investing in equity markets. Past performance is not a guide to future returns.  Investments can go down as well as up and you could get back less than you originally invest.