23 Aug How do trusts help when it comes to Inheritance Tax planning?
When we imagine the future, it goes without saying that we all want to retire in confidence and enjoy every day to the fullest.
The financial decisions we make today affect what that dream will eventually look like (and, quite often, how soon it comes true!) and none more so than our pension.
Today we’re exploring the whats, hows and whys of pensions, before answering the age old question: Do I need to think about my pension?
First things first – what is a pension?
A pension is a form of income that you grow over your life and later rely on when you retire.
The amount of income you receive once you’ve retired depends on much you’ve contributed during the years you’ve spent in employment.
In theory, a pension should allow you to live the life you want and enjoy your golden years without worrying about paying the bills.
However, pensions are long term investments, and like every financial decision they do carry some risk. In some cases, you may be able to grow your pension pot through savvy investments, but of course, you may get back less than you originally paid in.
What types of pensions are there?
While pensions come in all shapes and sizes, there are three main types.
- The state pension
Paid by the government and providing a secure income for life, most people are eligible for some state pension. From April 2016, the new flat-rate state pension has been in place, and as of 2021 it’s at £179.60 per week.
- Employer’s pension/Workplace pension
This is a pension offered by your employer, that you can choose to pay into, and eligible employees are often automatically enrolled. They tend to be either a defined contribution pension, where you and your employer both pay into your pension, or a defined benefit pension where your employer guarantees the amount you get depending on factors like length of service and final salary.
- Personal pensions
These are types of defined contribution pensions, except only you are paying into it. You choose the provider and make arrangements for your contributions to be paid, and like the workplace pension you won’t be able to determine how that capital is maintained or invested.
While these are the most commonly discussed pensions, there are additional approaches to saving for the future.
A Self Invested Personal Pension (SIPP), for example, allows you to contribute to your pension and gives you a wider range of investment options. With a stakeholder pension, any charges are capped at 1.5 per cent and you can stop and start premiums without penalty.
From workplace pensions schemes to lifetime ISAs, there’s plenty of choice depending on your situation. This is where impartial, independent financial advice can come in handy.
Why is it important?
The most important thing a well thought-out and planned-for pension can give you is peace of mind today, and the life you want to live tomorrow.
For most people, a full state pension is nowhere near enough to live on comfortably in older age, equating to £9,339.20 a year. Realistically, other measures need to be in place to ensure they don’t need to work past the average age of retirement, which was 65 years in the UK in 2018*.
That’s not to say a pension is the only way to accumulate capital and save for the future. It’s also worth noting that saving too much in your pension or taking too much out of your pension prematurely can also result in heavy tax bills.
However, by making the best financial decisions for you – whether you receive expert advice or not – it’s possible to ensure your pension flourishes under tax-efficient management.
Do I need to think about my pension?
It’s impossible to say for certain without knowing more about you but for 99 per cent of people, the answer to this question is a resounding yes!
Thanks to workplace pension contributions, it’s possible for someone in full-time employment to breeze through to retirement without worrying about how much is in their pension pot.
But even if that’s the case, if you’re starting to look ahead to retirement and querying whether you have what you need to live the life you want, there are ways you can nurture your future income further.
For people who are self-employed or own their own business, it’s incredibly important to consider how your pension pot is being filled.
According to IPSE, 15 per cent of the UK workforce are self-employed. Yet just 31 per cent of these 4.8 million people are saving into a pension.
The good news is that there are some great pension and long-term savings options out there. Whether retirement is decades or days away, there are almost always ways to make smart, measured financial decisions to make your money go further.
Whatever kind of life you want to enjoy in your retirement, discover how to make it happen by chatting with one of our friendly and highly knowledgeable advisors call us on 01606 338914