The Importance of Having a Pension
Paying in while you work
The concept of retirement is somewhat novel in the West and in some areas of the world, doesn’t even exist. Whether or not you decide to retire is up to yourself and your personal circumstances however none of us know what the future may bring which is why pensions are so important.
On a basic level, pension is money that you will use to live on when you retire. By law every employer has to enrol into a workplace pension, workers who:
• are not already in a qualifying workplace pension scheme;
• are aged 22 or over;
• are under State Pension age;
• earn more than a minimum amount (£10,000 a year, £833 a month, £192 a week in 2015-16); and
• work or usually work in the UK.
However relying on the State Pension to help support yourself in retirement with bills to pay, food and transport to pay for amongst social and leisure activities may not be easy as the maximum State Pension of £155.65 per week (effective from 6 April 2016).
Yet over half of people in the UK aren't saving enough or at all for the standard of living they wish to have when they retire and unfortunately, many of the elderly die in poverty as they haven’t been able to save enough.
To prevent this from happening in the future, especially because people are living longer and longer, you can put aside money during your workalike into a pension fun and when you reach retirement age, you can access money in your pension pot.
Some advantages of investing in a pension include:
Tax Relief – The government has instituted a policy of offering tax relief for pensions in order to encourage workers to save money for their retirements. The tax relief scheme ends up contributing money to your pension pot alongside the contributions made by you and your employer. This is essentially extra money given to you to help you plan for your future.
• Pre-Tax Savings – Along with the extra money contributed by the government, there is another tax related advantage of pension savings: the money you contribute is taken from your pay before income taxes are applied. Therefore, your tax liability is reduced during your working years. You will pay tax when you begin to withdraw the money, but it is not taxed in the year you actually earn it.
• Freedom of Access – Pension reform has led to a number of different means of accessing pension funds after the age of 55. Where most people chose to purchase an annuity prior to reform, the annuity is no longer the default. You have the freedom to access your pension in so many additional ways thanks to government reforms.
• Transferable – Pensions are easily transferable from one scheme to the next. This means they are also flexible to the extent that you are able to put your money into a pension scheme you believe will provide you with the strongest return. And unlike savings accounts, pension operators are actually competing for business.
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.
You will pay into it and your employer will pay into it too. They have to do this if you earn more than a certain amount (£5,824 a year, £486 a month, £112 a week in 2015-16). Plus most people will get a contribution from the government in the form of tax relief. This means some of your money that would have gone to the government as tax, goes into your pension instead. The Workplace Pension will work on a basis of “automatic enrolment" however you will have the possibility of opting out should you wish to do so.
It’s possible to get an idea of how much you will get from your workplace pension by getting a ‘pension estimate’ (also sometimes known as a ‘pension projection’). You can get this from whoever runs your pension scheme. You should then be able to estimate how much you can expect to get from your pension workplace scheme and whether this would be enough for you.
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 particularly well for self employed people as a way for them to save for their future.
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.
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.
Either way, it’s best to start a pension as soon as you start earning, if you can. If you're young, it's tempting to think that pensions are for older people but the earlier you start, the longer you'll have to put money away.