Pensions 101

How will you manage for money when you finish work?

The answer is of course, with a pension. 

It’s a simple enough idea. You save money while you are working to keep you when you are not.

But not only are there several types of pensions, there are several types of myths and misunderstanding built up around them.

At Continuum we help people find the pension arrangements they need and are appropriate for them. The first step is to clear up those misunderstandings and see exactly what kind of pension you need to be thinking about right now. 

Apart from the state pension, pensions require you to save for retirement, by building up a pension pot which will provide an income when the time comes. They are tax efficient, meaning you get tax relief on the money you put in – the taxman adds to the contributions you make. How much he adds depends on your personal circumstances and the tax rules – but could potentially make your pension your best ever investment. 

There are three main types of pension:

The state pension

This is the pension you get from the state (or government) and to claim it you will have to have made National Insurance contributions (NICs) for the required number of years. Visit  www.gov.uk/state-pension for more information on what you’ll get and how to claim.

Almost everyone will get a state pension, but at £221.20 a week or £11,502.40 a year, it’s not enough to live on, and you need to arrange other pensions as well.

Employer pension schemes 

By law, work pension schemes are provided by employers for their staff. You will pay in a minimum each month with an automatic deduction from your pay, and your employer must pay in with you. You can usually contribute extra – your employer may match it. The pension provider should send you a statement every year showing you how it’s doing even after you’ve left the business.

How much they will pay out depends on how much money has been paid in, the time it’s been invested and how much it has grown.

Individual Pensions

Whether or not you have an employer pension you can also save into an individual or private pension This can boost your pension and can be essential if you are self-employed or tend to change employers regularly. There are three main types.

Stakeholder Pension Plans

These are an affordable solution for pension saving. They have low flexible contributions, and you can stop, start and change what amount you pay in. You won’t have to decide where to put your cash; your money will be invested for you.

Personal Pension Plans 

These schemes tend to have a minimum contribution of at least £100 per month and higher annual charges than Stakeholder schemes. However, they normally offer a choice of funds run by the pension company’s fund managers allowing you to take control of where your money is invested.

Self-invested Personal Pensions – SIPPs

Traditional personal pensions limit your investment choice to a shorter list of funds. With a SIPP you can invest almost anywhere you like, even in things like commercial property, and still enjoy the tax advantages of pension contributions.

You should only consider a SIPP if you understand investing and are confident enough in your judgement. You could make some very speculative investments that turn out well, or you could make some expensive mistakes. But whatever you do, you should certainly get financial advice before you start.

What should you do?

The bigger your pension pot, the better retirement income you may look forward to. There is little you can – or need to – do to make the most of your state pension entitlement, other than ensure you have made the full NIC contribution over the years. 

Other types of pensions might benefit from some expert support. 

At Continuum we can provide support, starting with a full pension review and forecast of the kind of pension you are looking at now.

Then we can help you find alternatives to your current plans, and a new strategy that can help make your pension contributions work harder for you – and look to put the kind of retirement you want in reach. 

Your future depends on what you do today. So call us at Continuum for a free (no obligation) initial discussion about your pension.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.

A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.

The Financial Conduct Authority does not regulate taxation advice.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

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