Retirement should be something to look forward to. A time to enjoy new hobbies, travel, spending more time with the family. It should not be a time to worry about money, so your pension is probably the most important financial arrangement you will ever make.
Many of people find they have a great many questions about pensions, their financial jargon and complicated rules.
Here are some simple answers.
How do pensions work?
A pension is simply a tax efficient way to save for retirement – to build up a pension pot. Pension saving can be very tax efficient because you get tax relief on the money you put in. The exact tax benefits depend on your personal circumstances and tax rules, both of which can change.
The state pension
The new state pension was introduced in April 2016, and currently pays £159.55 per week. To claim it you will have to have made National Insurance contributions (NICs) for at least 10 years. Visit www.gov.uk/state-pension for more information on what you’ll get and how to claim.
Employer pension schemes
Work pension schemes are provided by employers for their staff. They can be a good option as most employers contribute to your pension fund, although you will need to pay in as well. Auto-enrolment legislation means by 2018, all employers will be required to enroll eligible employees into a pension scheme.
These can be Final Salary or ‘defined benefit’ schemes, which guarantee an income based on your salary and length of service with your employer, but these are now rare. More common are Group Money Purchase or ‘defined contribution’ schemes. With these your retirement income depends on a number of factors, including how much money has been paid in, the time it’s been invested and how much it has grown. You can find out more at www.workplacepensions.gov.uk/employee
You can also save in an individual or private pension whether or not you have an employer 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 contributions without penalty. You won’t have to decide where to put your cash; your money will be invested for you.
Personal Pension Plans
These schemes are likely to have a minimum contribution of at least £100 per month. They also have higher annual charges than Stakeholder schemes. However, they normally offer greater investment choice and flexibility with 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 and choose your own investments.
This means that you should only consider a SIPP if you understand investing, enjoy doing the necessary research and are confident enough in your judgement. You must feel comfortable managing your own investment portfolio and picking your own investments. You could make some very speculative investments that turn out well, or you could make some expensive mistakes. You could even invest in things like commercial property, and still enjoy the tax advantages of pension entitlement. But whatever you do, you should certainly get financial advice before you start.
What should you do?
The bigger your pension pot, the larger the retirement income you could 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. But you may want to make sure you are making the most of your employers pension, if you have one, and perhaps see if you could be making the most of an individual pension as well.
Watch out for part 2 of our pensions guide, which will explain exactly how and why a pension can be the most tax efficient investment you will ever make, as well as being an essential for a prosperous future.
In the meantime, if you have any questions about making the most of your pension plans, please call us at Continuum.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.