Thanks to press attention, pensions have come to the attention of people who might not have previously considered their retirement funds. However, although people are now becoming aware of the importance of our pensions, some aren’t aware of the options available to them. True Potential found that 57% of over 55s didn’t know how they would access their pensions.
What will you need to secure a comfortable retirement?
Depending on the quality of life you plan to have during retirement, this will influence the amount of money you need to put aside for your pension. Keep in mind that your pension is likely to cover you for 20 to 30 years. True Potential estimates that you’ll need £23,000 a year in retirement. This is almost four times the £6,000 Brits are on course to receive each year.
When deciding how much you’ll need, remember that your outgoings will likely be significantly less in retirement, as your mortgage could be paid off, children will have left home and you won’t be commuting into work each day.
Your State Pension offers an additional £7,582 per year for those retiring after April 2016. This can help to boost your pension pot. However, you must reach State Pension age before you can qualify for it. This age is currently 65 for men and between 60 and 65 for women, although it is expected to rise in the coming years.
What are your options?
There are several options available, and the type of pension that you choose should be based on your own individual needs.
A personal pension gives you complete control over where and how any of your money is invested – and you are required to set money aside each month, but this is capped at a total of £40,000 per year. However, this is dependent on your earnings. Once you reach 55, you’ll be able to access your funds. This can be used to purchase an annuity—a regular monthly income until you die — or take a regular income using Drawdown.
You can also access 25% of your total pot tax-free as either a lump sum or smaller withdrawals.
A workplace pension is one that is organised by your employer. Three people contribute to this. You, your employer and the government contribute to your pension pot. 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.
However, the minimum contributions are on course to rise to 5% in April 2018 – this would mean 2.4% from you, 2% from your employer and 0.6% as tax relief. Another increase is scheduled for 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
There is a level of flexibility with defined contribution pensions. They can be paid into by either, you, your employer, or even both. They are a type of both personal and workplace pension. 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
A definite benefit pension is solely a workplace pension, and the amount that you contribute depends on numerous factors, including your salary, how long you’ve worked for your employer and the pension scheme’s rules. This type of pension guarantees a set pension pot once you retire.
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.