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Should I get a pension?

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When we are young, having fun, seeing friends and planning holidays abroad, probably the last thing on our minds is what will happen when we retire – we will never get that old, right? Well the majority of us will and it really is worth planning for our financial future including for our pension so we can have a little peace of mind when we reach our golden years.

Pensions can be complicated

Pensions can be a complicated minefield, but you shouldn’t be put off. When put simplistically, a pension is just a way of saving money without being taxed on it, for you to use in retirement. You can either draw money from your pension fund or you can sell it to an insurance company who will pay you regularly until death, called annuity. Nowadays, most companies will have a pension scheme where you contribute an amount of your monthly salary into your pension and the company will also contribute to it as well. While you may not be getting as much in your monthly wage, you are budgeting for the future and getting additional payments from your employer towards your retirement. With less than one in three adults in the UK contributing towards a pension, companies are now setting up auto enrolment pension options. If you choose not to contribute you can opt out, but if you do nothing, you will be automatically added to the pension scheme. This is designed to try and combat the extreme lack of retirement savings.

Tax relief, especially for higher rate tax payers

Pension contributions also offer different forms of tax relief. If you or your employer have paid into your pension, you will automatically get 20% tax back which will be paid into your pension fund, if you employer hasn’t already deducted this from your salary. Higher rate taxpayers can claim an extra 20% with top rate earners and extra 25%. In layman’s terms, this means that the tax office will work out your wage before tax was deducted and you get back the difference between your pre tax wage and your pension contribution.

Should I get a pension?

How much should I contribute?

How much to contribute to your pension will obviously depend on your own personal circumstances, but in general, put in as much as you can afford. The sooner you start contributing and the more you pay in, the more money you will have for retirement. Many people might not be able to sacrifice a large amount of their income when they first start a pension, so a great tip is to increase your payment with pay rises. As you normal salary contribution will increase with a rise, then add a little extra of the pay increase to your pension fund so you can benefit in later years from the money you put in, whilst still enjoying a pay rise at the time of working.

Different pensions available

There are many different pensions out there but the main two are private pensions and final salary pensions. A private pension normally comes in three different forms; a standard pension, a stakeholder pension and a self-invested personal pension (SIPPS). A standard pension is what is says on the tin, a standard pension that you or you and your employer has paid into every month until you retire. The money is invested by the pension company to enable you to (hopefully) get the best from your contributions.  A stake holder pension is similar to this but offers more flexibility, lower minimum contributions and a default investment choice so you don’t have to decide where to invest your cash.  If you want a hands on approach to your pension then a SIPP allows you to choose where you want to invest and do the leg work yourself. If you are prepared to research and invest well, then SIPPs can work out better financially and cost less.

Final Salary Pensions are often thought of as benefit schemes from your employer. A percentage amount of your final salary is paid before retirement or when leaving the company, as an annual income. The amount is dependent on how long you worked for your employer and is normally an accrual rate which is set by them. For example, if the rate is 1/60th, you get 1/60th of your final salary for every year worked for them. If you worked for 15 years, you would get 15/60ths – in other words, a quarter of your final salary. Although many of us aren’t sure exactly how long the state pension will be around for, we shouldn’t forget it! The money that is taken from our salary as national insurance is what is used to build up your pension contribution; at the moment it is paid at £110.15 a week.

When can I get my hands on my pension?

So you are coming up to the magic retirement age, what happens now? Unfortunately, you can’t just take your cash as and when you want. You have to wait until you are at least 55, at which point you can take 25% as a tax-free lump sum, the rest of which will be paid in regular payments as a taxable income. One of the biggest decisions you will have to make is whether you chose to buy an annuity with the remaining amount. This will pay you a regular income until death; however the risk of not buying annuity is that you will run out of money!

While all these decisions may not be a worry at the moment, they will be in older age so it’s good to at least start the ball rolling as soon as possible. Speak to a financial advisor or citizen’s advice, family and friends to think about options available to you. A bit of prudent planning now can stand you in good stead for a long and happy retirement!

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About Rebecca Robinson

About Rebecca Robinson

After spending the last 8 years juggling life as a mum of two, wife and working full time as a Project Manager for a global telecommunications company, Rebecca Robinson made the decision to follow her love of writing and took the plunge; turning her passion into a full time career. Since becoming a full time writer, Rebecca has worked with various media and copy-writing companies and with the ability to make any topic relevant and interesting to the reader, now contributes to The Working Parent on articles ranging from credit cards to teenage relationships. Ever the optimist, Rebecca's dreams for the future include a house in the country filled with children, dogs and horses in the field!

Website: Rebecca Robinson

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