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Thinking of starting a pension?

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We might not want to think about getting old or starting a pension, but it’s important to consider how you’ll survive financially once you retire. It’s never too early to start planning for the future and contributing into a pension. However, with the day to day costs of living, especially when raising children, it can be hard to find the money to spare.

Less than half of us are prepared

According to the Scottish Widows Annual Pensions Report 2013, only 45% of us are making adequate plans for retirement. Worryingly, 20% of people are saving absolutely nothing. If you’re thinking of starting a pension where should you start? There are different options available to you, so you need to understand what they are and the best choice for your circumstances.

Personal Pensions

Anyone can start a personal pension and it doesn’t matter whether you’re employed, self-employed or out of work. They’re offered by banks, building societies and life insurance providers and it’s up to you how much you contribute. There’s no limit to the amount you can put into a pension fund each year. However, tax relief on contributions is limited to either £50,000 (for the 2013/14 tax year) or 100% of your salary, whichever is the lowest.thinking of starting a pension

Generally with a personal pension, your funds are invested for you, depending on the level of risk you want to take and the income you’re looking for in retirement. Whatever type of plan you choose, there is the possibility that your investment could depreciate and you’ll end up with less than you put in. Your pension provider will send you an annual summary showing how much your fund is currently worth and the expected amount at retirement based on your current level of contributions. A personal pension is a good option for those who are self-employed, have no access to an employer scheme or have chosen to opt out and those who are currently not working.

Stake holder pensions

Stakeholder pensions are a form of personal pension. They offer a flexible option, as you can contribute a minimum of £20 and you’re not restricted to a set monthly amount. The Government oversees stakeholder pensions to ensure that they’re providing good value for money.

Self-invested pensions

There are also self-invested personal pensions (SIPPs), which are only suitable if you understand the investment market and are confident in where your money should go. They offer more options in where your money can be invested and there’s the opportunity to manage the fund yourself or through a fund manager or stockbroker. The charges for SIPPs can be significantly higher than with other types of personal pension. They’re a better option for those with larger investments, rather than general consumers.

Employer Schemes

As well as personal pensions, some employers will offer a pension scheme for employees. With the changes to Government legislation, it will become compulsory for all companies to provide a pension scheme for their employees. This has started to roll out with the largest companies and will eventually apply to businesses of all sizes. Employees who earn over a minimum amount and are aged between 22 and the State Pension Age will be automatically enrolled into their company’s pension scheme, unless they already have a suitable plan or opt out. These schemes can offer a greater benefit than personal pensions, as your employer will also contribute to your fund, allowing you to build up a larger investment. If you have a workplace pension you can also save into your own personal pension as well.

Using your pension

You can choose to take your pension at any time between the ages of 55 and 75. If required you can have up to 25% as a tax free lump sum and use the rest to buy a regular income for your retirement. Alternatively, you can convert the whole investment into an income.thinking of starting a pension

It’s important to consider how much you’ll need in retirement to maintain the standard of living you’re used to. Currently, all pensioners are entitled to the basic State Pension, with an additional amount based on National Insurance contributions. However, over the next few years changes will be made to how much you’re entitled to and when you’ll be eligible to claim it. Therefore, you need to think about contributing to a personal or workplace pension to top this up.

Independent advice

The pensions market can be a difficult area to understand, but it’s important that you know exactly where your money is being invested and the potential risks involved. Before you decide on a pension fund, it’s a good idea to seek independent financial advice. The right product for you will depend on how much you can afford to invest, when you want to retire and the risks you’re willing to take.

 

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About Catherine Stern

About Catherine Stern

Catherine Stern is a freelance writer with a background in marketing and PR. She currently writes web content on a range of subjects, from finance and business to travel and home improvements. As a working single mum of two young boys she understands the pressures that today’s working parents face and the topics they want to read about.

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