Beginners guide to pensions
Unsure why you should save up for a pension? Here’s some hints and tips on what you need to know about pensions.
What is a pension?
A personal pension is basically, a regular payment made by you, your employer and sometimes the government, at times that pays into your retirement fund. It was recently announced that if you have a personal pension, you are unable to access it until your 55.
Is it worth it?
The most obvious reason why you should have a pension is that you will have guaranteed income throughout your retired life. Here are a few more reasons:
Benefit would be earning compound re-investment. This is where profit you earn on your money is re-invested and starts to earn on itself and invested again and so on. So throughout your working life, you can earn a decent amount just through compound re-investment.
Also, when you pay into a personal pension, you will usually qualify for tax relief on your contributions. Meaning, you can claim relief back from the government as your money you pay in is your net salary (after tax)
If you pay into an occupational or public service pensions your monthly pension contributions are deducted from you gross wage (before tax wage), In other words you don’t pay any income tax on the money.
Employer pension contributions
Many employers will now add contributions to your retirement whilst you are employed to them. This is known as a workplace pension scheme, the law states that the minimum requirement you pay is 0.8% of your qualifying earning and your employer pays a minimum of 1%
For example, let’s say each payday you put in £40, then your employer puts in £30 and also you get £10 tax relief, that’s a total of £80 going into you pension each pay day. However this depends on how much your employer pays in your pension.
While not all companies offer pension schemes, however new regulations have now come into force automatically enrolling workers in the UK who are aged 22 or over into the employer pension scheme. As of the moment, large public and private companies have opted into the scheme. By 2018, all employees will be auto enrolled and all employers will have to add contributions, though you do have the right to opt out if you do not wish to enroll.
How do I get a pension?
One way to get a pension is the aforementioned auto enrollment implemented by your employer. However if you wish to apply for your own pension you will have to search for the best deals from an independent financial adviser. Since January 2013, unfortunately you have to pay a fee for advice.
Types of pensions?
When applying for a pension, you will be offered many different types of pensions so it important that you choose the right type. As stated above we would recommend you to visit an independent financial adviser. Here are a few personal pension schemes to glance at:
Workplace pension scheme
This is where your employer and you would make regular monthly payments into your company pension until you are retired.
This is where you receive a small pension form the government, until you hit retirement. You build entitlement by paying national insurance (NI) throughout your working life.
Group personal pensions
This is between you and third party insurance providers. Typically, your employer will choose the provider, these arrangements usually offer you a choice of investments
Is it safe?
If protection fails, the financial services compensation scheme (FSCS) will transfer your funds from the failed company to another company. If that also fails you can claim against the firm for mis-selling and get compensated up to the investment limit of £50, 000.
Pensions are an investment and investments are risk based products, meaning your initial investment and any income generated could rise or fall. These tips should give you an idea on what pensions are, how you can apply and what types of pensions are available. Speak to an independent financial adviser for further clarifications if in any doubt.