Saving for retirement, what pensions are available?
September the 15th is pension awareness day.
A day to look at the importance of saving for the future.
Saving for our retirement may seem tedious at times, it is however one of our greatest financial priorities, especially as life expectancy is growing and retirements are likely to last longer.
The idea behind a pension scheme is very simple: it is essentially a pot of cash that you, and your employer agree to contribute to, which you get tax relief on and which you can make use of once you exceed a certain age. Essentially exchanging a portion of your monthly income now, for a future pay rise.
The main benefit of a pension scheme is the tax relief, which depends on your tax bracket. You get some tax back when money goes into the pot, but also gain tax reliefs when the pot money is invested.
A lot of the criticism you may have heard about pensions stems from misunderstanding what a pension plan is and the fact that sometimes the investments don’t pay off.
The plan is not in itself a high-risk arrangement, the risk comes from where and how the money is invested.
There are different types of pension schemes:
- State pension: This is available when you exceed the age of 67 and is payed for as part of your National Insurance contributions.
- Workplace pensions: These can be divided into trust-based and contract-based. You and your employer make a monthly contribution which you gain access to when you hit the age of retirement. The money is held by a company until that time.
- Group personal pensions: These are usually set up with the involvement of a third-party insurance provider that looks after the money, usually chosen by your employer, and allow for different investment options.
- Pension schemes that involve a trust: With these pension types, the money is placed in a trust fund under the control of a board of trustees. This fund allows for benefits to be given to any next of kin who are financially dependent, i.e. spouse, underage children etc. and is kept separate.
- Self-Invested Personal Pensions: This is basically a DIY pension arrangement which allows for control of where the pension money is invested. With this arrangement the investor essentially does all the legwork of managing the money.
- Stakeholder pensions: This arrangement means that the pension scheme allows for lower and more flexible minimum contributions as well as capped charges.
Managing your retirement cash is something that you can do with complete freedom, after the changes introduced in 2015. It also means however, that you should be taking an active interest in your options when it comes to your retirement pot and also perhaps speak with a financial adviser or an estate planner in order to be made aware of your options and any potential pitfalls.