For most of you, your pension might be at the back of your mind because it seems like a lifetime away. However, as recent press attention has showed us, putting money towards our post-retirement fund is incredibly important. It is never too early to start planning for your pension.
But with this in mind, people put off planning their pension because they are unaware of the options available to them. Here, True Potential Investor explain the options:
Attitudes towards the UK pensions:
According to the Office for National Statistics (ONS), there has been a drop in people contributing to their pensions. Figures show 50% of people didn’t contribute to their pension in 2014/15 — up from 38% in 2010/11. This stagnation is largely attributed to rising living costs and unemployment.
2016 has seen a shift in attitudes and, according to True Potential Investor, there was a drop in the amount of people who didn’t contribute to their pensions pots. In Q3 of 2016, just 35% put nothing towards their pension. This is a reduction of 4% on the previous quarter. We’re clearly becoming more aware of the importance of pensions, but do we truly understand our options?
What options are available to you?
Most of you will get a choice in what type of pension you want. There are several types of pensions available. Generally, they are broken down into two categories: personal and workplace pensions.
Auto-enrolment pension plan
Your employer must make a workplace pension scheme available for their employees. It is a retirement investment scheme whereby each month, you’ll pay a percentage of your salary into the retirement pot. Your employer and the government will also contribute.
A workplace pension currently has a minimum contribution – at present this stands at 2% of your earnings. This is broken down to 0.8% from you, 1% from your employer and 0.2% as tax relief from the government. As of April 2018, this minimum will increase to 5% (2.4% from you, 2% from your employer and 0.6% as tax relief) and by April 2019, it will be 8% (4% from you, 3% from your employer and 1% as tax relief).
Defined contribution pension vs defined benefit pension
People might get these types of pensions confused because they sound the same – however they are completely different. Defined contribution pensions can be either a workplace or personal pension, with the money paid in coming from the employee, employer or both. The money is invested, so the amount you receive is dependent on the investment’s performance and how much is paid in.
However, with a defined benefit pension plan, they are always workplace pensions. You’re guaranteed a certain amount once you retire, although this is dependent on your salary, how long you’ve worked for the employer and your pension scheme’s rules.
Personal pension plan
A personal pension is individual to you. The money you pay in is invested with the aim of growing the fund before you reach retirement. You have control over how and where the amount is invested.
However, there is a limit on how much you contribute to it each year. Currently, £40,000 is the maximum you can invest in a single year, although this does depend on your earnings. When you reach 55, you’ll be able to access your fund, taking an income via Drawdown or purchasing an annuity to receive a regular monthly payment. You’ll be able to access 25% of the total amount tax-free as either a lump sum or many smaller amounts.
A comfortable retirement
Whatever pension type you choose, it’s important to be aware of how much money you will need when you reach retirement to live comfortably. True Potential Investor’s Savings Gap report found that to live comfortably in retirement, you’ll need £23,000 per year. However, in reality, Brits are on-track to receive just £6,000 per year from their retirement fund.
Be aware that your pension pot will need to keep you going for around 20-30 years – and after working your whole life, you will want to live comfortably and enjoy your retirement. When determining how much to set aside each month, remember that your outgoings will likely be significantly less once you retire — for example, you’ll likely have paid off the majority or all of your mortgage and will no longer be supporting your grown-up children.
Remember your State Pension could potentially top up your pension pot to make retirement more comfortable. Those retiring after April 2016 will receive £7,582 per year — although you have to reach State Pension age before you can access this fund. Estimates predict that this age will rise to 70 by early 2060, so this should be a key consideration in your pension plans.
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.