A Look At Pensions

Moolr decided to look at pensions, a matter that is of great interest to us all. After all, a pension is a way of saving for your retirement. You put money into your pension each month. In return, the pension provider gives you a regular income once you’ve retired. Pension contributions are tax free. This is one of the reasons saving into a pension can be more effective than saving for your retirement in other ways. The State Pension is intended to ensure that everyone has a foundation for their retirement income. A foundation to support them in their old age. State Pensions are funded from National Insurance (NI) contributions. What you’ll receive doesn’t directly depend on how much you have earned but on your own NI record.

What type of pensions are available? 

Some pension schemes are available as part of your employment, other schemes you take out as an individual. These are the different types you can have:

Work Pensions

Many employers have workplace pensions made available to you.  In most cases your employer makes contributions to your pension through the scheme. Sometimes you are too make a contribution which is deducted directly from your wages. 
Either way, if your employer contributes it is essentially free money.  When you retire you can use the sum you’ve saved up to purchase an annuity, so the exact amount you get will depend on the value of your pension pot, and the rules and annuity rates at the time.

The holy grail of pensions is something called a final salary pension scheme.  These are much less available these days, as they proved very expensive for the employer to run.  If you are offered one it is nearly always a good idea to join, as this type of scheme will guarantee an amount of pension based on the number of years you’ve worked and your salary when you leave or retire. This is what an old employer will  provide to me when I retire,  as I was part of the Department For Works and Pensions for 13 years.

Auto Enrolment

Due to recent changes in the law, your employer now must provide you with a basic workplace pension and make you part of it unless you tell them that you don’t want to join – this is called automatic enrolment. Good news for all employees in the UK, if not for the employers themselves.

State Pensions

This requires you to make payments throughout your working life via National Insurance contributions in order for the government to pay you a salary once you reach retirement age. Due to recent government changes, you’ll need 35 years of contributions to qualify for your pension. Also expect the retirement age to continue to rise in line with the average life expectancy doing similar. 
The most you can currently get is £129.20 per week. The basic State Pension increases every year by whichever is the highest of the following: earnings – the average percentage growth in wages.

Personal Pensions

You make regular payments into your pension fund. The fund is then invested in stocks and shares with the aim of increasing the amount over time, before you retire. You can use the final pot of money to buy an annuity, invest elsewhere, taken as a lump sum, or a combination of these options.

You can’t tell in advance exactly how much pension you’ll get because it depends on how much you pay in. Other factors include how well your investments do and what charges you have to pay. If your investments do badly, you could end up with less money than you expect.

Stakeholder Pensions

Similar to personal pensions, but they have to meet minimum standards set by the government. These include management charges not being more than 1.5% of the fund’s value for the first 10 years and 1% after that. You must be able to start and stop payments when you want or switch providers without being charged. You can begin to make payments into a stakeholder pension from £20 per month. Because of the government introduction of auto-enrolment, this type of pension is likely to be much less popular in the future.