Managing Money

Pensions

Everyone needs to plan for retirement. People are living longer and healthier lives, so these days it’s even more important to think about how and when to save for retirement. Retirement can last for 20 or 30 years or more. The basic State Pension is a start but it may not be enough to give you the standard of living that you want.

So, you might want to consider another source of retirement income. It’s never too early to start saving for your retirement.

What The State Provides

While you’re in paid employment, you are usually paying National Insurance contributions. This means you are building up the right to get a basic State Pension when you reach State Pension age.

If you are paying a certain level of National Insurance contributions, you may also be building up an additional State Pension called the State Second Pension (previously known as SERPS- State Earnings Related Pension Scheme). If you’re self- employed you cannot build up an additional State Pension.

Currently the State Pension age is 65 for men and 60 for women. But the State Pension age for women is gradually going up to 65 by 2020. You don’t have to take your State Pension at these ages; you can defer it until a later date and get an increase in State Pension or a lump sum.

Pensions At Work

If you work for a business with more than 5 employees, your employer should offer access to a pension scheme. They may offer a:

  • Salary- related occupational pension scheme (defined benefit);
  • Money-purchase occupational pension scheme (defined contribution);
  • Group personal pension; or
  • Stakeholder pension

Your pension from a salary-related occupational scheme is worked out using your salary and the length of time you were in the pension scheme.

The other three are all ‘money-purchase’ pensions. The income at retirement from these schemes depends on your contributions (and your employer’s contributions, if any), plus investment returns and tax relief.

Stakeholder pensions have to meet certain standards set by government, such as:

  • Flexible contributions- so you can choose when and how often to pay into the scheme; and
  • Capped charges- the provider can only charge you a maximum of 1.5% of the value of your pension fund each year; which reduces to 1% after 10 years.

Some employers’ pension schemes may not require you to contribute (non-contributory) while others require an employee contribution (contributory).

You can pay as much as you like into all your registered pension schemes but there are limits on the amount of tax relief given.

There is also a lifetime allowance limiting how much you can build up in all your pensions free of any tax charge when you come to draw your benefits.

You don’t have to join a pension scheme offered by your employer but it’s usually a good idea to consider doing so if your employer contributes to it. You can also get other benefits, such as:

  • Life insurance
  • A pension if you have to retire early due to ill health; and
  • A pension for your spouse or other dependants when you die.

Ask your employer what type of pension they offer and what benefits are available.

Private Pensions

If your employer doesn’t offer a pension scheme (or if you are self- employed) you may decide to contribute to a private pension. You can choose a stakeholder or a personal pension. With a private pension, you choose the provider and where you want your pension contributions to be invested.

You can use the Money Advice Service pensions calculator to work out how much of a pension you can expect to receive when you retire

Personal pension charges may be similar to stakeholder pension charges, but some personal pensions are more expensive than stakeholder pensions. You can compare pension features and charges on the Money Advice Service comparison tables at tables.moneyadviceservice.org.uk/Comparison-tables-home/.

Planning for retirement is a balancing act. This is an area where professional advice is highly recommended.

By law, most financial firms in the UK must be authorized by the FSA, the UK’s financial watchdog. So always ensure that you use an authorized firm. You can check whether a firm is authorized by checking the FSA register at www.fsa.gov.uk/pages/register/or by calling the FSA Consumer Helpline number on 0845 606 1234.

If you want to find a local financial adviser go to www.unbiased.co.uk and you will be given details of three local advisers.