Pension types: how much do you know?

We know that pensions are important, but just how much do you know about your options? True Potential Investor, a personal pension provider, has created this guide to understanding how much you’ll need and the pension types you can choose from.

Elderly person with a walking stick

How much are we setting aside and how much do we need?

Recent years have seen a positive shift in the number of people contributing towards a pension. True Potential Investor’s Tackling The Savings Gap Consumer Savings and Debt Data Q3 2016 report found that only 35% of people didn’t put money towards their pension — down from 39% in Q2. The number of 24-34 year olds making no pension contributions fell to 19% — down from 26% in the previous quarter too.

It’s clear that we’re aware of the importance of setting money aside for retirement. However, just how much do we need? According to True Potential Investor’s Savings Gap campaign, £23,000 is needed annually on average, to live comfortably in retirement.

In reality, Brits are likely to receive just £6,000 per year from their retirement fund. In fact, the average UK person’s monthly contribution to their pension pot is £325. What we think we should be doing and what we’re actually doing or are able to do are clearly very different.

You’ll need to live off your pension for a number of years after your retirement. Therefore, it’s key that you set money aside now to sustain you in the future.

Understanding your pension types

In order to make the right choice for your future, it’s important to understand some of the different pension types available.

Personal pension

A personal pension works by letting you pay in amounts as and when you want. The amount is then invested with the aim of growing the fund over time before you retire. You can decide where and how the money is invested to grow.

A stack of £20 notes

You can only invest up to a maximum of £40,000 each year, although this does depend on your earnings. The current minimum age to withdraw your funds is 55 years.

When you retire, you can use the amount to purchase an annuity, which is a regular monthly payment that’s paid until you die, or take an income from this by using Drawdown , giving greater flexibility to how you use your pension.

From April 2015, retirees can access up to 25% of their pension pot tax free.

Personal pensions: the benefits

  • You’ll receive tax relief on your personal pension contribution.
  • You can invest with the aim of increasing your overall fund.
  • They’re useful for self-employed people, who don’t have access to a workplace pension.

Auto-enrolment

Workplace pensions are organised through your employer. You’ll pay a portion of your wages each month into the pension pot, with your employer and the government also contributing.

A minimum contribution is in place; currently, it is 2% of your earnings. This breaks down as 0.8% from you, 1% from your employer and 0.2% as tax relief from the Government. This will increase from April 2018 to 5% of your earnings (2.4% from you, 2% from your employer and 0.6% as tax relief). From April 2019, this will increase again to 8% of your earnings (4% from you, 3% from your employer and 1% as tax relief).

In order to qualify for auto-enrolment, you must:

  • be over 22
  • under the State Pension age
  • earn over £8,105 a year.

It is also possible for those who earn less, are under 22 or work on a part-time basis to opt in, while anyone can also choose to opt out. By 2018, all employers must offer auto-enrolment to a workplace pension scheme or access to an equivalent scheme such as a group personal pension.

Auto-enrolment: the benefits

  • Auto-enrolment makes it easy to join a workplace pension scheme.
  • You can invest with the aim of increasing your overall fund.
  • You’ll receive contributions from your employer and enjoy tax relief from the government.

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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