Why it's a good idea to start saving tax efficiently
As an employee, self-employed person or public sector employee, you are entitled to a state retirement pension at the end of your working career. In some cases when you are a salaried employee, your employer may pay money into a group insurance scheme or pension fund each month. Even this sum of money doesn't always guarantee a comfortable life further down the line. However, you can also take the initiative yourself and engage in tax-efficient saving, which is easier to do than you might think.
1. Get up to 30% tax relief on what you save
Saving for your retirement is rewarded by the government in the form of tax relief of up to 30% each year. That can amount to as much as 337.50 euros for pension saving and 735 euros for long-term saving.
2. Build up an additional pension pot without too much effort
By the time you retire, your state pension will probably not be enough in itself to enable you to live as comfortably as you do now. At present, the average pension is 1 700 euros net per month (source: PensionStat). The difference between your salary and your state retirement pension can be considerable. We call it the ‘pension gap’. However, you can close that gap by saving in a tax-efficient way.
3. Save flexibly: choose how much you save and when
Maximum tax-deductible amounts are set each year by the government. You can easily spread your payments over the year and you're under no obligation to pay in the maximum amount eligible for tax relief. Gradually saving small amounts is better than doing nothing at all.
4. Force yourself to save
Although it may sound like a disadvantage, it’s actually a really good thing. That’s because when you put money into a tax-efficient savings scheme, you deliberately leave it there for later and you’re in no rush to withdraw it early. Therefore, you’re far less inclined to dip into your savings and spend them.
5. Start as early as possible and gain more in the long term
When's the best time to start saving tax efficiently? The simple answer is to start as soon as you can, or at least, as soon as you receive a salary and pay taxes. Not only your savings, but also the possible returns grow every year. We call that the capitalisation effect. The longer you save in this way, the more chance you have of building up a tidy nest egg for later. All forms of tax-efficient saving – from savings-linked insurance products to investments – entail costs and risks. This is normal when you're looking to achieve higher returns than you would with traditional savings products.
How can you save tax-efficiently?
There are two ways to save while paying less tax, and those are pension saving and long-term saving. Both methods have the same goal in mind. If you have a bit more financial leeway, you can even combine both methods.
