Originally posted on plungedindebt.com

When you hear the word pension, it can cause your head to spin and your heart to sink, as with any term used heavily in the financial industry.

A Pension is 

a regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life.

Though you may not think a pension is relevant to you now, there are major benefits to investing sooner rather than later. It’s well-worth working to understand them better and seeing if this type of investment is suitable for you.

You’ll be getting “free” money

Many employers will offer their employees a pension package when they are hired. Money put into a pension is invested by a pension company and when you retire you get a lump sum from this investment. Often, employers will match or make contributions to your pension as you do – giving you “free” money, in a sense. It may seem like retirement is a long way off but investing in a pension scheme is worth considering, especially if your employer contributes as well.

Tax benefits

A pension plan has tax breaks that you should be aware of as this gives it a major benefit over traditional savings accounts. Income and capital gains tax do not apply to money invested in a pension. Money is taken out of your paycheck every month and put into your pension plan before tax is deducted from your salary. This will only benefit you, as waiting until your check is taxed and then putting your own designated amount into a savings account, as a way of saving yourself, will stop you from getting that tax relief, never mind the benefit of having your retirement money out of reach to stop the temptation of spending it.

You can go private

If the company you work for doesn’t offer a pension scheme for its employees or you are self-employed then do not despair. There are private pension companies and investment firms you can choose to go with, as well as personal plans such as TFSAs. Your contributions to TFSAs (Tax-Free Savings Accounts) will have been taxed in your paycheck, but any withdrawals, in other words, any interest you earn, is not subject to tax.

If unsure, meet with a financial advisor and get their advice. They can help you decide how much you can afford to invest every month and calculate how much you can collect when you retire. There are a variety of options available and once you understand the basics, you’ll see that investing in a pension is a great way to save for your retirement.