PENSIONS 

Pensions: The biggest investment you will ever make

Saving for retirement is one of the biggest investments that people make and the most popular way to save for your retirement is in a pension. A pension is an income that you will receive when you retire. It is a regular savings contribution and a long term investment. Many people choose to ignore the idea that one day they will be old but everyone needs to plan for when they retire, especially as people are living longer. The sooner you start paying into a pension the higher your income in retirement will be. To encourage people to put money away for their retirement, the Government provides tax relief on pension contributions. When you pay into your pension fund, the Government adds the tax that you have paid, or would pay, on that money. However, there are restrictions on how much you can contribute, depending on what type of pension scheme you have.

When can you access your pension?

In the UK the earliest age you can take your pension is 55 but most people choose to wait until they are 60 or 65 but you do not have to retire from work to get your pension benefits. You can put off taking your pension until you are 65. There are certain situations where you can take your pension before you are 55. Your pension scheme provider will tell you what your scheme allows. There are three main types of pension. The first is the State Pension which is provided by the government. However, many people will not be able to live just on this amount alone so if you think you are likely to need more than this then you should consider a retirement plan. Some employers will provide a salary-related pension and lastly there are personal pensions which you pay money into. You can build up your own pension through a private pension plan or put a portion of your earnings into a company pension scheme.

Investing in a Pension scheme

Generally speaking your pension fund is invested and when you retire the money you have accumulated over the years is used to buy an annuity which will provide an income for the rest of your life. The amount of this income depends on a number of aspects, including the amount you have contributed, how the money was invested, the age you are when you take out your pension, you gender, health and how much you get for the annuity. The final value of your pension fund will depend mainly on how much has been paid in and how well the fund’s investments have performed.

Where are pensions available from?

Personal pensions are available from banks, building societies and life insurance companies who will invest your savings on your behalf. You can save as much as you want with a personal pension and you can pay regular monthly amounts or a lump sum to the pension provider. Personal pensions are suitable for those who are self-employed, people who are not working but can afford to pay for a pension and employees whose employers do not offer company pension scheme. To choose the right pension provider your decision will mainly depend on how much you can afford to save for your pension. Make sure you know what the rules on making contributions are and how the money will be invested.

Advantages and disadvantages of pensions

Pensions come with tax breaks. It is therefore a tax-efficient way of saving to secure a regular income when you retire. Remember however that tax rules can change over the years and this may affect your pension fund. Personal pension funds usually invest your money in shares and although there are certain risks involved, shares usually deliver a better return than cash savings over a long period. In most cases the money in your pension fund can’t be accessed until you retire, so you won’t be tempted to spend it.

A disadvantage is that you can’t access you money until you are near retirement, you can’t access the money if you need it in a financial emergency. As personal pension funds are typically invested, the eventual size of your pension cannot be guaranteed. If for example you have chosen to invest in shares, these could end up performing badly and you could end up with less of a return than you hoped for. It is also important to watch out for charges. For a basic pension you should expect to pay a single annual management charge. There may be other administrative costs depending on what type of pension you have and which provider you choose.