Pensions overview
A pension scheme is a special type of investment. It pays for a particular part of your future, namely when you retire.
So you probably haven't given a pension much thought. You might also have seen on TV that in this country, the pensions industry is in quite a crisis. We'll come to that later, but whether you decide to get a pension or not, you should spend a little time understanding them now.
Where will my retirement money come from?
Most people don't want to work till they drop and there are already plans to raise the retirement age to 70. The money to look after you in retirement comes from a few places:
- The Government. If you're working, you pay National Insurance Contributions. Some of that goes towards your state pension. The bad news is that state pensions aren't very generous - in 2008-9 older people get £90.70 a week for a Basic State Pension. Find out more about pension rates on the DirectGov website.
- Your savings and investments. If you become very successful, you might just have enough to live on. But that's a gamble, and besides you'd probably rather use your savings to enjoy your free time rather than for survival.
- Your employer. Most large companies have company pension schemes. You pay a certain amount from your salary into the scheme (with tax relief), and the good news is, your company will usually contribute on top of what you put in. If you leave the company, you can continue the scheme, leave it on hold, or sometimes transfer it to a private scheme. Some lucky people (e.g. civil servants) have final salary pension schemes which guarantee an income based on their salary when they retire, but these are very rare, and are rapidly being phased out.
- A private pension scheme. Irrespective of where and when you work, a private scheme is your own private retirement nest egg. It's portable between jobs, and usually flexible (try to get one that is!) Most people these days use a private scheme.
Why a pension?
The reason to invest in a pension scheme is simple: they're very tax-friendly. The government wants you to provide for your own retirement, so depending on your tax bracket, instead of taxing you, for every £78 you put in a pension the Government actually adds £22. Nice!
What's gone wrong in the pensions market?
Pension companies invest in the stockmarket; and that has crashed far worse than city experts expected. So in the past year, many pensions companies have admitted that they won't be paying out as much as they had promised. Indeed some are on the verge of bankruptcy. So you must get professional advice before committing to a pension.
This is boring. Why start a pension now?
The earlier you start a pension scheme, the more you'll save. The money you save aged 25 is worth up to eight times the money you put in aged 45 when you come to redeem it. So for a secure retirement, the earlier you think about a pension, the better.
What's a Stakeholder pension?
These are a low-cost pension, which the government introduced in 2001. They're not different from normal pensions, but are designed for low-earners, because they have very low management charges. They haven't been too successful, mainly because they also don't necessarily offer the best rates of return.
What's an annuity?
When you retire and pick up your pension, an annuity is a scheme that pays out your pension in regular chunks, like a salary. To prevent you blowing your entire pension on holidays and horses, you are legally obliged to put most of your pension into an annuity.
Where do I get one?
Start with an independent financial adviser. The consultation should be free, and a good adviser is worth their weight in gold. There are also some great guides, including those provided by Money Made Clear and Directgov.
