Last month Pension Awareness Day was celebrated with the aim of raising awareness of the importance of saving for the future and to make people aware that they are not saving enough for the future. All this talk of pensions and savings got us thinking about why they are so important when considering retirement?
By law employers now have to provide workers with the option of a ‘Workplace Pension Scheme’, this is called ‘automatic enrolment’.
So what is all the fuss about?
Here is our simple guide where we will be breaking down the ins and outs of pensions.
According to the Money Advice Service more than half of the UK population are either not saving or not saving enough for retirement. The UK populations inadequate saving towards retirement is particularly concerning when considering that a state pension, though available for everyone, may not be enough to live on. To save earlier in life may be a wise option to then be able to top up later and save you from struggling and one way to do this is by a pension.
But what is a state pension?
A state pension is funded by National Insurance Contributions which are paid during your working life and therefore the amount you receive will depend on how much you have contributed. You will be able to receive your state pension when you reach state pension age which is currently 55 but is subject to change.
There are also additional benefits you can claim when you reach pension age known as Pension Credit. Pension Credit is a benefit which comes in two forms, Guarantee Credit which will top up your weekly income to £151.20 if you are single and to £230.85 if you are a couple. The other part of Pension Credit is Savings Credit which will be available for those who reach state pension age on or after 6th April 2016 it is an extra weekly payment of up to £14.82 if you are single and £17.43 if you are a couple for those who have saved money towards their retirement.
According to Age UK 4 million people in the UK are eligible for Pension Credit but only one in three of these are claiming so make sure you check your entitlement!
You can calculate when you will reach State Pension age or Pension Credit qualifying age and how much you will get by clicking here.
Current State Pension will be changing to a new system which will affect people reaching state pension age from 6th April 2016 onwards so make sure you stay up to date to see how this may affect you.
So why take out a pension? What are the advantages?
By putting money into a pension you will not only be saving money for the future but your savings will grow.
If you are working, enrolling in a pension scheme will mean regular contributions based on a percentage of your salary are taken from your wages which will be invested so they grow throughout your career and provide you with an income in retirement. Workplace Pensions may be looked at favourably as employees also have to pay contributions towards them as well as the government in the form of tax relief. You could describe a pension as a long-term savings plan with tax-relief as money put into a personal pension scheme qualifies for tax-relief therefore money that would have gone to the government as tax goes to your pension pot instead.
By October 2018 it will be compulsory for all eligible employees to be enrolled in a workplace pension. Defined contribution and defined benefit are the two main types of workplace pensions. Defined contribution is the most common and involves the pension funds being put onto various investments such as stocks and shares. Defined benefit schemes pay an income when you retire based on how much you earn.
In addition to Workplace Pensions there are also Personal Pensions which are usually set up by individuals and can be defined as a ‘contribution pension scheme’. With Personal Pensions there is the option of setting up regular monthly payments or giving a lump sum to a pension provider who will invest on your behalf. Contributions to Personal Pensions attract tax relief and can still be taken out if you have a workplace pension.
Personal Pensions can work well for self employed people as a way for them to save for their future.
Self-Invested Personal Pension
A Self-Invested Personal Pension or SIPP is similar to a Personal Pension but the main difference is that with an SIPP the individual has more flexibility with the investments they can choose. With an SIPP as you are able to have greater flexibility in choosing and managing your own investments there can be higher charges and therefore this option is recommended for those with larger funds who may have experience in investing.
Stakeholder pensions are similar to personal pensions and have to meet government standards to ensure they are good value. A stakeholder pension is an individual contract between yourself and the pension provider.
So the main benefits of a pension are;
• They qualify for tax relief
• If you are in employment your employer will usually match or better your contributions
• When you reach qualifying pension age you can take 25% of your pension savings as a tax free lump sum
• The earliest you can access your pension savings is when you reach qualifying pension age but you do not have to retire to do so
So overall, pensions appear to be a great way to save for the future and ensure you are comfortable in retirement. If you are in employment there are great advantages as your employer will also contribute. For those who are self-employed there are still issues regarding financial inclusion when it comes to pensions. Self-employed income often fluctuates making it difficult to commit to a certain monthly amount to be paid in to a pension pot. The Royal society for the encouragement of Arts, Manufactures and Commerce’s recent report comes up with some suggestions regarding the self-employed including how pension providers could tailor schemes to suit the financial situations of the self-employed.
Pensions can ultimately help us all make sure we have an additional income in retirement to state pension so that we have enough to live off, however for schemes to become completely inclusive for all, the financial circumstances of the self-employed will have to be considered and schemes to be tailored to their needs.