Your pension will determine your quality-of-life post-retirement. This guide explores everything that you should consider.
Have you started to think about your pension? There’s no set rule on when you should start saving up this money. However, it is accepted by financial experts that the earlier you being to save, the better off you will be. The state pension provides a basic income and no more; individuals need to make their own contributions to enhance their retirement lifestyle.
Ultimately a pension provides a tax efficient savings plan where you pay in regular amounts of money throughout the year while you are still working. This will allow you to build up a pot of money that you can then use as an income once you retire. There are alternative ways to build up your post-retirement income. However, a pension is the most tax efficient way of making regular contributions to save for retirement. Presently (as of July 2022), for every £100 you save a further £25 is added by the government. This could be more if you pay higher rates of income tax.
How Do Pension Investments Work?
The pension pot is invested in a choice of pension funds. These are chosen by your financial adviser who can help select the most suitable investments for you. The investments you make should grow over time, thus maximising the value of your savings. This will provide you with the highest amount possible when it is time for you to retire.
What Happens When You Retire?
When you retire as much as 25% of your pension can be directly taken out as a lump sum. This is tax-free while the remainder of your pension savings is used as an income. This can be managed as an annuity or taken directly from your pension fund; this is known as flexible income drawdown. There are other options available to help you have the retirement income best suited for you; pension advice is crucial at such a time.
Different Types Of Pensions
There are two different types of pensions aside from the state pension. These are a workplace pension and a private pension.
Workplace Pension
If you earn at least £10,000 per year and are over the age of 22, your employer is required to automatically add you to a workplace pension scheme. There are two types. These are a final salary scheme and money purchase scheme.
With a final salary scheme, you contribute to a scheme that will pay you a specific monthly income once you retire. You don’t need to purchase an annuity however, due to the cost for employers these schemes are uncommon.
A money purchase scheme will provide you with a retirement income based on how much you have paid in and the performance of your chosen investments over time. You can either purchase a drawdown income or annuity to convert the final pension into a retirement income.
Personal Pension
Personal pensions are arranged by yourself, and anyone can set one up. They are suited for self-employed individuals who will not receive a pension from an employer or as extra contributions to those made by employees in their workplace pension. A personal pension scheme will provide you with a retirement income based on how much you have paid in and the performance of your chosen investments over time. You can either purchase a drawdown income or annuity to convert the final pension into a retirement income.
How Much Do You Need To Pay Into Your Pension?
The amount you should save can be viewed from different angles:
- How much can you afford?
- How much income do you want in retirement?
- How might your pension investments grow?
A financial adviser can help you understand and build a monthly savings program for you so you know how much you should be saving to achieve your retirement goals.
It’s different for everyone.
How Long Will Your Pension Need To Last?
It’s important to be aware that life expectancy increases every year. So, it’s possible that once you retire you could live for an additional thirty years. As such, you need to make sure that you do have a pension in place which will provide support for this time in your life. You should also think about the extra costs that you may need to pay for as you age. This could include options such as live-in care or residence in a retirement village. It all depends on the type of lifestyle that you want after you retire.
OTHER FACTORS TO CONSIDER
If you work for a business, you might also want to check whether a company will match your contributions to your pensions. This essentially provides you with a way to earn ‘free money’. Many companies do provide this option and it’s a key question that you should consider at any job interview.
On top of your employee pension, you should also explore a private pension scheme. This won’t deliver any employer contributions but will still offer significant levels of tax relief to further boost your retirement savings
You can also top up your state pension with any voluntary contributions as well. One of the reasons that you should consider this is if you don’t have a lot of qualifying years on your national insurance records.
Explore Salary Sacrifice Options
Your employer may offer you access to salary sacrifice schemes. This is a useful option and will provide you with the possibility of giving up a portion of your pay. The company will then put this percentage of your pay into a pension along with their contribution. There are significant benefits here that you should be aware of. For instance, it will reduce your gross salary. As such, you won’t be paying as much in tax, but you will still be receiving this money in your pension. Your employer will also need to contribute less to national insurance and this can lead to direct savings for your pension.
Find Lost Pensions
Most people will not keep the same job throughout their entire life. Most people will have more than three jobs working with different companies. This might mean that you have multiple pension pots, and you could lose track overtime. Typically, you should receive a statement of different pensions. However, if you don’t have this, then you may want to track them down. You should start by contacting the company that managed the scheme. However, if you don’t see any success here, then you may want to use the pension tracing service that is provided by the government or ask your financial adviser to help you.
Check Where Your Pension Is Being Invested
Another way to boost your pension is to complete checks on where it is being invested and how these specific investments are performing. Ultimately, you should check whether they are providing the right level of returns that you need. A financial adviser is best suited to help you here.
If you are paying into a pension through an employer, you are likely paying through a standard default fund. This could mean your pension investment isn’t making as much for you as you might want. Ask a financial adviser to investigate this for you so you can understand all of your investment options.
UNDERSTAND YOUR STATE PENSION
- When will you receive it?
- How much will it be?
- Are you on track to receive a full state pension?
- Or do you need to make additional national insurance contributions?
- What happens if you defer your state pension?
Speak to your financial adviser to learn about your state pension and how it can work for you in line with your workplace and personal pension arrangements.
We hope this helps you understand some of the key points that you should consider when planning your pension and ensuring that you get the fantastic retirement you deserve.
