Three types of pension – and how they can add up to a comfortable retirement

We all know that we need to save money for our retirement and that a pension scheme is the way to do it.

At Continuum we are looking at three different pension types, and why a comfortable retirement may mean making the most of all three.

The best investment you will ever make?

Your later life should be your golden years – a time to enjoy life on your terms after decades of work.

It does not happen by itself. You need to make the right pension arrangements now to reap the benefits later. 

Tax relief means a pension is likely to be the best investment you ever make. Basic-rate taxpayers get 20% pension tax relief. Higher-rate taxpayers can claim 40% pension tax relief, and additional-rate taxpayers 45%. Every pound a basic rate taxpayer puts in their pension pot costs them 80p, while a higher-rate tax payer pays just 60p. So even before compound growth and skilled investment management get to work, your pension has already started earning you money. 

There are three main types of pension scheme. 

Workplace pensions

All companies must offer their staff access to a workplace pension. 

There are two main types. Defined benefit or final salary, where the retirement benefits you receive are based on your earnings and the length of service with the employer and defined contribution (or money purchase) which is now more common.

The Government has set minimum levels of contributions that must be paid to the workplace pension scheme by you and your employer. These are invested in a managed pension fund and the benefits you receive will depend on the amount you and your employer have paid in, how long it is invested, and how well the investment performs.

There are several different types of personal pension. Not all of these offer the latest pension freedoms that allow flexible access to your savings.

Personal pensions cover a wide range of schemes and are available to all.  A private pension allows individuals to contribute from their earnings, which is usually invested into saving schemes or mutual funds, run by insurance companies. They are likely to have a minimum contribution of at least £100 per month and 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 some control of where your money is invested.

Stakeholder pensions are an affordable solution for pension saving introduced in 2001 to simplify pensions and reduce charges. 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.

SIPPs (self-invested personal pensions) allow people with experience of the financial markets to select and manage the investments held. Some SIPPS allow investment in single company shares and individual commercial properties, or more investments such as storage units and overseas forestry operations. You should only consider a SIPP if you understand investing, enjoy doing the necessary research and are confident in your judgement

The State Pension

The State Pension is the pension provided by the Government when you reach State Pension age. The amount you receive depends on your National Insurance contribution record.

If you reached State Pension age on or after April 6, 2016 you will get the new State Pension payment, which from April 6 2022 will be a maximum £185.15. per week. However, not everyone will receive the full amount. The actual amount you receive will depend on your record of National Insurance (N.I) contributions. You need 35 years of contributions to enjoy the full pension.

You will probably be able to claim some level of state pension – but most people will find that it is not enough for a comfortable retirement. 

Getting pensions working together

The problem is that a long and active retirement is expensive.

This is why it is important to have either an employer’s pension, or a private pension – or both – as well as the state pension. By getting them working together, in a carefully planned investment strategy, you can stand the best chance of enjoying the kind of retirement you want.

At Continuum we can provide expert help with planning your investment strategy. 

We can start with a pension review, looking at your current arrangements, and provide a forecast of the kind of retirement income they could offer.  If your current plans are going to fall short of your retirement needs, we can help you set up additional schemes which will take full advantage of the special status of pensions – and provide the kind of retirement you want. 

The sooner you start the easier it can be. Call us at Continuum for the help you need.

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

The value of investments can fall as well as rise and you may get back less than you invested.

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. Pension income could also be affected by interest rates at the time benefits are taken.

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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