It may seem strange to be considering retirement at the start of your working life, but the sooner you start saving for your future the more comfortable your later life will be. Putting money into a pension pot as soon as you start earning will lead to a good retirement income. Even if you have already been working for a number of years it’s never too late to start paying into a pension – every little bit helps and it’s possible to buy back some of the lost years.
If you work for a large company you are likely to have been invited to pay into their corporate pension scheme. These are usually defined benefit pension schemes, sometimes known as final salary schemes. You and your employer will both make tax-free contributions and how much you get at the end will depend on a number of factors including how long you worked for the company and your salary.
Anyone who works for a small business or is self-employed is likely to pay into a personal pension. These are known as defined contribution pension schemes. If you’re employed, you and your employer will make contributions or if you’re self-employed, you make the contributions yourself. The contributions are tax-free and the money will be invested so your final amount in the pot will depend on how much you have paid in and how the investments have performed.
A pension is an efficient and easy way to save towards your retirement. Whilst the Government offers a state pension to anyone who has paid national insurance contributions over the years, it’s not a great deal of money so the Government advises everyone to contribute to a workplace or personal pension to top up that retirement income.
If you work for an employer, you will be offered a workplace pension. Under new Government rules, an employer must have a workplace pension scheme in place for every employee aged between 22 and state pensionable age who earns £10,000 a year or more and works in the UK. Often, particularly for small businesses, these workplace pensions are personal pensions ie defined contribution schemes. Your employer must enrol you automatically in the pension scheme unless you ask him not to. Your contributions will be taken from your pay before tax so the contributions are tax-free.
Your pension is tax free so your pension provider will claim tax relief at the basic rate and add the amount you your pension pot. You may also choose where you want your contributions to be invested as they are usually spread out between different funds.
If you’re self-employed or not working you can still enrol in a personal pension scheme. In this case it’s worth paying for advice from an Independent Financial Advisor to make sure you find the right scheme for you. Your contributions will still be tax-free – the equivalent amount you would have paid in tax will be added to your contribution to go straight into the pension pot.
If you don’t want to join a workplace pension scheme or are self-employed and you’re confident in financial matters you can set up a personal pension yourself, either by going to a pension provider directly or by going through a specialist pension discount broker. If you buy into a personal pension scheme this way, expect to pay some set-up fees and you may also be charged annual management fees.
Personal pensions come in many different forms and vary in how much influence you have over where your money is invested. Workplace pensions tend to involve regular monthly payments and are usually trust-based or group personal pensions.
Trust-based pensions: The investments using the money paid into the pot by you and your employer are managed by a board of trustees. Pension benefits can be passed on to your partner or other dependent family members.
Group personal pensions: Your employer chooses the pension provider who gives you a choice of investments.
Stakeholder pensions: Along the same lines as workplace pensions but with flexible and low minimum contributions. They also have capped charges and no option to choose the investment.
Self-invested personal pensions (Sipps): Great for people with some financial know how or good advice, these are effectively DIY personal pensions as you can choose how your money is invested.
Most personal pension schemes don’t allow you to access your money until you’re aged 55. At this point you can withdraw a lump sum of up to 25% of the total pot without it being taxed. Any more than that and the cash becomes taxable.
Under new Government rules, you can do what you want with your pension money, although many people still choose to buy an annuity, which provides you with a regular income for life. If you don’t need the money yet you can leave it as an investment or you could buy a flexible income drawdown product which leaves the money invested but still allows you to draw an income when you need it.
The rules surrounding personal pensions have changed recently and even more changes are being considered so the best place to start for more information is the Government website at https://www.gov.uk/personal-pensions-your-rights. Money advice websites such as moneysavingexpert.com have extensive information and advice about personal pensions.
Free advice on pension options and saving for retirement is available from the Money Advice Service and the Pension Advisory Service. If you don’t already have one, you can find an Independent Financial Advisor at unbiased.co.uk or the Personal Finance Society.
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