Pension plans: what is available to you?

For some of you, it might feel way too soon to be thinking about your pension. Frankly, it’s never too early to start planning your retirement future. Whilst we chase promotions and strive to hit our career goals, we should be contributing towards our retirement pots to secure ourselves a comfortable retirement.

A happy retired couple

Despite recent press attention telling us how important our post-retirement fund is, a lot of people put their pension plans to the back of their mind because they are unaware of their options available to them.

Are attitudes changing?

Worryingly, in 2014/15, 50% of people didn’t contribute anything to their pension, according to figures from the Office for National Statistics (ONS). This was a rise from 2010/11 when that figure was 38%. This stagnation is largely attributed to rising living costs and unemployment.

However, 2016 has seen a shift in people’s attitudes towards pensions. Clearly, people are becoming more aware of the importance of our pensions. A study by personal pension provider, True Potential Investor, found that just 35% of people put nothing towards their pension in Q3 2016 — a reduction of 4% on the previous quarter. Whilst awareness is on the rise, do we truly understand our options?

What types of pensions are available to you?

You may be unaware that you have a number of options to choose from – pension types are generally broken down into two categories: personal and workplace pensions.

Personal pension

One of your options is a personal pension plan – this is a scheme where you personally pay in amounts that are invested with the aim of growing before you reach retirement age.  You have control over how and where the amount is invested.

Increasing stacks of pound coins

There is a limit on how much you can contribute to your personal pension each year. Currently, the limit is based on your earnings for the year and is capped at £40,000. 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.

Auto-enrolment

Your employer must automatically enrol you in a pension scheme for your workplace. This type of pension is an investment scheme whereby you will contribute a percentage of your salary into the pot, and as will your employer and the government.

Currently, the minimum contribution is 2% of your earnings – this is broken down as 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

Sometimes a defined contribution pension can be mistaken for a defined benefit pension – they are actually very 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.

Defined benefit

With a defined benefit pension, 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.They are always workplace pensions.

Putting money aside for a comfortable retirement

After working your whole life, regardless of the type of pension you have, the aim is to live a comfortable retirement. For that to happen, you’ll need to have a clear idea how much you’ll need in retirement. 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.

An elderly person clasping his hands

Bear in mind that your pension pot will need to fund you for around 20 to 30 years so it needs to be substantial. 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.

Your State Pension is another way that you can ‘top-up’ your pension pot. If you retire following April 2016, you will be entitled to £7,582 per year. To receive State Pension, you must first 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.

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