What do I need to know about pensions?
A pension is a form of saving for retirement, with some associated tax
advantages. When you retire or reach a certain age, a pension scheme pays you a
regular income for life. For most companies it's an obligation to give you
access to a pension scheme or at least point you towards a financial advisor who
can explain the ins and outs of the thousands of pension options that are
available.
How much pension do you need?
The big question. You can have as big a pension as you can afford, but here are
some tips to get a rough idea of how much you will actually need:
It's difficult to judge what your situation will be if your retirement is a long
way away, but if you take your fixed living costs, such as food, council tax and
electricity, and add some estimated annual leisure activities, such as holidays,
theatre trips and dining out, you should be able to get an estimated monthly
expenditure.
Remember that unlike your current situation, by the time you retire you may no
longer be paying rent or a mortgage and you will also not have to encounter work
related costs, such as commuting expenses and buying work attire.
Once you've got an outline figure for your desired retirement income, take it to
an independent financial adviser or other pension expert and plan how to provide
for it. You could also try one of the many pension calculators available to give
you a quick idea.
Remember, the earlier you start a pension, the less you will have to pay each
month to reach your target retirement income.
State pensions
Once upon a time, this was all that was required. Nowadays, its value has slowly
eroded to the point where it now barely provides a living income, even with no
mortgage or other major costs to pay. Unless you're happy to spend the rest of
your life counting every penny, you will almost certainly need to make
additional private provision for your retirement.
The amount of State Pension you do receive will depend on the level of National
Insurance contributions you've made throughout your working life. Even then, if
you haven't paid NI contributions for enough ‘qualifying years', you may not get
the full amount.
Company pension schemes
Many companies offer their own scheme and you're advised to sign up to it,
especially if you don't have alternative provision. There are two main types of
scheme:
- Salary related pensions - based on your salary and the number
of years you are in the scheme. These generally call for higher contributions
through the life of the plan.
- Money purchase pensions - based on how much you pay in and how
those funds have performed over the life of the scheme. This is usually used to
buy an ‘annuity' or income for life.
Company schemes require you to make a regular contribution based on a percentage
of your salary, to which your employer may choose to make an additional payment.
It's likely that you will also be able to make extra voluntary contributions of
your own to increase your final pension benefits.
If you pay into a company scheme, your employer pays your contributions before
tax has been deducted, which essentially means your tax bill is reduced.
The age when you can actually draw your pension is set out in the terms and
conditions of each scheme. Ask your company pension administrator or external
financial advisor for the specific details of your pension.
Personal pensions
In addition to conventional pension schemes, where you place your money with a
trusted provider and let them do the sums, there are plenty of alternative ways
to invest to provide an income for yourself in retirement.
Most of these involve bricks and mortar and can be anything from letting out
multiple properties to provide a regular income or trading down to a smaller
property to free up funds. The housing market is relatively stable but has peaks
and troughs based on many uncontrollable factors.
If you want to get really involved, a Self Invested Personal Pension (SIPP) plan
allows you to work closely with an advisor to where and how to invest your money
for the best return.
All investment strategies carry an element of risk, and some can be extremely
risky. As a general rule, you should never place a large proportion of your
funds with one provider or solution. Always try to spread your exposure to risk
and unless you're an expert in investments and pensions, always seek advice
before making any investment decision.
