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What are Pension Savings Accounts?

As we approach retirement, we all need to have thought about how we will fund the future. All UK taxpayers should receive some form of state pension. However, this can vary in amount and is often not enough to afford the type of retirement we all envisage. Some of us may have an income from a pension we have earned over several years working at the same firm, while others will have saved enough elsewhere to pay for their retirement.

What are Pension Savings Accounts?
Rachel Lee
· 6 min read

As we approach retirement, we all need to have thought about how we will fund the future. All UK taxpayers should receive some form of state pension. However, this can vary in amount and is often not enough to afford the type of retirement we all envisage. Some of us may have an income from a pension we have earned over several years working at the same firm, while others will have saved enough elsewhere to pay for their retirement.

There are many ways to save for a pension, but there isn’t actually any such thing as a pension savings account. Instead, it is up to each individual to choose the most suitable financial instruments and savings products on the market as a fitting place to save their money. The products and instruments which are suitable depend on your circumstances, including age, health, living arrangements, or any other income.

This article looks at what places could be suitable for saving or investing money to build up a pension pot. We also identify current legislation and policy that can have a bearing on how or when you pay into such accounts - in terms of tax and specific criteria you may have to meet.

What exactly are pension savings accounts?

As briefly mentioned above, pension savings accounts are a bit of a misnomer. There are no actual savings accounts designed purely with pension saving in mind - though you can use many to save for a pension. There are, however, other products out there specifically designed to help you save for your retirement, like a SIPP or a workplace pension.

How do pension savings accounts work?

Several savings accounts can be used to help save for a pension. Among many others, there are:

They all work in different ways, and they all have their pros and cons in terms of what they offer savers, which you need to consider with your circumstances in mind. Perhaps the most vital idea to keep hold of when using any of these products is that you are saving for your pension. For that reason, it is best not to touch these pots of money until your actual retirement unless you have a genuine need to do so.

What are the benefits of using savings accounts for a pension?

It can be confusing to know whether it is better to use a pension product to pay into for your retirement or use more generic savings accounts. Here are the benefits of using savings accounts to build your cash for retirement:

Easier access

Perhaps the most valuable benefit of putting money into savings accounts as opposed to pension pots is that you can access it without incurring huge penalties. When withdrawing money from a pension pot early, you are hit with a large tax bill that can seriously impact the value of what you saved up so far. While some savings accounts, like a fixed rate bond, will have penalties for early withdrawal, you can at least access your funds should you need to without materially damaging its value.

More flexible

The flexibility that using savings accounts for your pension can provide is a bonus. Plus, you can use many different types in conjunction with one another to reap the rewards that each product type can offer. Pension specific products, however, have stricter criteria for how and when they can be used upon retirement.

What are the disadvantages of using savings accounts pension?

While saving for a pension using savings accounts can be a good idea for many, it is still beneficial to be aware of disadvantages in choosing to save in this way as opposed to utilising a pension plan.

Tax

Saving into a pension is tax-efficient in a way that paying into a savings account is not. There is tax relief for every pound a person pays into a pension product so you can save 20% in tax if you are a basic rate payer, 40% if you are a higher rate taxpayer and 45% if you are an additional rate taxpayer. This makes your earnings go that much further and can help boost your pension plan more quickly than you can with a savings account. At present, in the UK, each citizen can pay up to £40,000 into a pension plan or 100% of their earnings (whichever is less) without incurring tax. While everyone can pay into a tax-efficient ISA, you will already have paid tax on what you open an ISA with.

Allowances and limits

ISAs are popular savings products as the interest earned is free from tax. However, their most significant disadvantage is that you can only open one a year and only save up to a certain amount. That amount may not be enough for your needs, which is why the larger allowances of a pension plan can be more helpful.

No top-ups

Once a tax year has finished, ISA allowances are used up automatically - even if you have not managed to make use of one. However, with a pension plan, such a restriction is not the case. In fact, with a pension plan, you can use up any of the unused tax relief allowances you have not made use of in the previous three years.

Pension savings accounts - key takeaways

You may well become very confused by what pension savings accounts are considering the sheer amount of them you can open to build up a pension pot. In fact, that amount can be overwhelming, given the importance of choosing the right account that will make your money work as hard for you as possible. However, these savings accounts also need to be weighed up in relation to available pension plans - either through your workplace, a personal plan, or a SIPP. Saving for retirement is a daunting task, but it has to be done in some way. Sadly, a state pension simply won’t provide the standard of living that so many of us grow used to when earning a salary, so it falls to each individual to ensure they have the funds they need available to them.

Rachel Lee
Rachel Lee
Having worked at Morgan Stanley and BNYMellon for over 10 years in pensions and investments, Rachel naturally started to move towards investment writing more and more in her day job. Rachel now works as a full-time business and financial writer - drawing from her hands-on experience in the field.
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