Why it's a good idea to start saving tax efficiently
Saving tax efficiently is something you do for later, for when you retire. When you go down that path, the government rewards you by giving you tax relief each year on the amount you saved in the previous year, as long as you're still a taxpayer.
There are currently three ways to prepare yourself financially for retirement.
- 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- fficient saving, which is easier to do than you might think.
Read on to find out more.
How can you pay less in taxes?
There's no other way to put it, but by the time you retire, your state pension will not be enough in itself to meet your needs at that time.
On average, someone who's self-employed receives a pension of 823 euros per month, a salaried employee 1 053 euros per month and a public sector employee 2 515 euros per month.
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.
Closing the gap
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:
- You potentially build up a tidy nest egg for later and pay up to 30% less tax on the amount you save each year.
- The return varies depending on what you choose to do. Depending on the product chosen, tax-efficient saving may involve a greater or lesser degree of risk.
- 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.
If you have a bit more financial leeway, you can even combine both methods.
Good to know
When you open a pension savings account, you automatically opt to make socially responsible investments. That's a win-win situation for you and everyone else on the planet.
Start on time
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.
A clear view
We explain the difference between pension saving and long-term saving on the next page.