What do we know about pensions?

The media constantly tells us to pay more attention to our pension pots, so it’s hard for the topic not to be at the forefront of our minds. But the question is: do you know your options? In their Tackling The Savings Gap Q3 2016 report, personal pension provider True Potential Investor revealed that 57% of over 55s were not aware of how to access their savings or investments. With that in mind, a guide has been created to help you understand what options are available to you.

How much will you need in retirement?

To live comfortably throughout your retirement, it is estimated that you will need around £23,000 a year. However, people are currently on course to receive just £6,000 a year! This is just over a quarter of True Potential’s estimation.

Your pension will likely need to cover you for 20 to 30 years, so the money you save prior to your retirement needs to be substantial. However, your monthly outgoings are likely to be less than you pay now – children will have most likely left home, daily work commutes will no longer apply and there is a good chance you will have paid your mortgage off. However, despite this, you will still need to put aside a substantial amount.

Whilst retirement might seem like a lifetime away, it’s never too early to start contributing to your pension pot. Naturally, the more you contribute during your working life, the more financially comfortable you’ll live throughout retirement. But remember to factor in your State Pension. Currently, you’ll receive £7,582 per year once you reach State Pension age – for men, the age is 65 and for women, it’s between 60 and 65. This age is expected to rise over the next few years.

What types of pension are available?

Choose a pension based on your individual needs. The following types are available:

Personal pension

With a personal pension, you can choose the amount of money you want to set aside each month to grow over the years.

Despite having full control, you are limited to investing no more than £40,000 a year, depending on your salary. Once you hit 55, you can access 25% of your funds tax-free. The rest of your funds can be used to purchase an annuity—a regular monthly income until you die — or take a regular income using Drawdown.

Auto-enrolment

Your employer can organise a workplace pension that you can sign up to – this type of pension means that three parties contribute to your pension pot:, you, your employer and the government. At present, the minimum you can contribute is 2% of your earnings, whereby you put in 0.8%, 1% comes from your employer and 0.2% from tax relief.

The minimum contributions are set to increase in April 2018 to 5% (2.4% from you, 2% from your employer and 0.6% as tax relief), then again in April 2019 to 8% (4% from you, 3% from your employer and 1% as tax relief).

To qualify, you’ll need to meet the following requirements:

  • Be over 22
  • Be under the State Pension age
  • Not currently in a scheme
  • Earn over £8,105 a year

Defined contribution pensions

Similar to auto enrolment, defined contribution pensions can be paid into by more than just you – your employer can also contribute. Realistically, it’s a type of pension than combines both personal and workplace pensions. Because the amount you pay in is invested, the amount payable in retirement is dependent on how much is contributed and the investment’s performance.

Defined benefit pensions

This type of pension guarantees you a set pension when you reach retirement.  The amount of money is dependent on factors such as your salary, the pension scheme’s rules and how long you have worked for your employer.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Tax rules can change at any time.

Andy

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