There are few guarantees in life. For many, growing older is one of them – and growing older with not enough to survive on, is a frightening prospect. The best time to start preparing, and to look at ways to best grow your pension, is when you enter the workforce – experience teaches that the longer one waits, the harder it gets. The good news is that you have every chance of maximising your retirement income if you look at the options available to you.
FOR THE FINANCIALLY SAVVY AMONG US
Some people are experienced in choosing their own investment vehicle: They gain knowledge from studying financial markets, they follow the property market and, over time, feel they know when they should buy or sell – the profits are often re-invested in either property or other schemes. Some are willing to go further and try their hand at stocks and shares. These options all carry a higher risk than the pension fund which most people are familiar with.
One of the methods most people rely on is a pension fund – some believe the best still is investing in a pension fund combined with other methods. Looking at the pension structure in the UK, it is clear that in broad terms there are two main categories: Pensions for those who work for a company and those who are self-employed.
One of the great benefits of the pension is the tax benefits for the individual. You get tax back on what goes into the fund, and gains are largely tax-free. A great plus is the 20% tax from government that automatically goes into your pension pot (the total amount that forms the basis of your retirement fund).
It is always a good idea to put in as much as you can into a pension fund, but if you’re paying off debt, try and settle that first. It makes perfect sense that the longer you contribute to a pension fund the better off you’ll be at retirement. Also, if you can, keep increasing payments as much as your circumstances allow, especially when your salary increases – the end result will benefit you.
The Company Employee:
- If you’re employed in the UK, the government will add to your fund, and your employer may also be forced to contribute. Not all companies have a pension scheme for their employees, but from 2018 every company that employs people will be forced by government to contribute to workplace pensions. This is called auto-enrolment – it is the individual’s choice to refuse their company’s pension scheme; however, one has to think carefully before deciding not to join as the employer may actually add to your range of benefits as part of your total remuneration package. Remember too that you reap tax benefits on your employer’s contribution.
- Upon retirement, from age 55, you can withdraw 25% as a tax-free lump sum from your so-called pension pot; the rest will be kept to provide an income for the rest of your life. Or you can invest the money with an insurance company –this is called an annuity. This is up to you – you decide how you want to spend that 25%. You are also free to take more than 25% but you will be taxed on your marginal rate for whatever you withdraw above it. Tax and pension experts will advise you that it is better to either leave that 25% in your pension fund or to buy an annuity or even a flexible income drawdown product that will still grow your investment.
- As opposed to the company pension, the self-employed (or those who don’t want to be part of a company scheme) must find their own way of providing. If you feel confident enough about your options, you will source the market for the options and decide who offers you the best deal. For most it would be advisable to talk to an Independent Financial Adviser (IFA) even though you will be charged for that service. Also, be sure the IFA looks at the best options for your circumstances. Let him/her show you proper comparisons.
Savings in a Lifetime ISA (Individual Savings Account) is another great way of boosting (not replacing) your pension and will be available from April 2017 for those under 40. A great incentive is the 25% that will be added by the state on top of what you save! From age 60 you can access the money in your savings tax-free.
It is also good to know that in case of bankruptcy, pensions have advantages over an ISA. In such a case pension pots are not regarded as wealth and will not prevent you from claiming benefits – an ISA, however, is looked upon as personal wealth and will reduce the benefits you can claim.
Like we said earlier, there are no absolute guarantees, but be aware of risk-based investments: In case of investment companies going bust, your risk of losing out is higher than it would be with, for instance, a pension fund. In certain cases the Government’s Pension Protection Fund may, subject to certain limits, pay some compensation. It is VERY IMPORTANT to always check with your pension and investment provider since protection for pensions is an extremely complex subject. So, before you make any final decisions, be sure that you have all information at your disposal.