Everything you need to know about pensions in the UK
What is a pension?
A pension is a regular savings contribution with the purpose of allowing the saver to live without having to work at the point of retirement. It is a tax-efficient way of saving to ensure a regular income when you retire.
Even though some people prefer to ignore the fact that some day they will be old, everyone needs to plan for their eventual retirement. People are living for longer. People are generally more healthy than ever. This means that it is now more important than ever to think about what you will be living on in your retirement.
To encourage us all to put away money for our retirement, the Government provides tax relief on pension contributions. When you pay into to your pension pot, the Government adds the tax that you have paid - or would pay - on that money (although there are restrictions on how much you can contribute, depending on what type of pension scheme you have). For example, you will only pay £80 (as a basic rate taxpayer) for every £100 you put into your pension, as the remaining £20 that you would normally pay in taxes will go into your pension instead. This will be higher if you are a higher/additional rate tax payer.
You can build up your own pension through a private pension plan or put a portion of your earnings into a company pension scheme. Many employers will pay into your pension in addition to your salary. With the Government and possibly your employer topping up your pension whenever you contribute to it, you are effectively getting extra money added for free.
Your pension fund is invested and when you retire the money you have built up over the years is used to buy an annuity which will provide an income for the rest of your life.
For most people, how much this income will be depends on a number of factors - the amount you have contributed, how the fund was invested, the age you are when you take out your pension and how much you get for the annuity.
Itís also worth bearing in mind that tax rules can change over the years and this may affect your pension fund.
If you are one of the dwindling number of people with a defined benefit pension (final salary) from your employer, the size of the payments will be based on how long you have been in the job and how much you were earning when you retired - your final salary.
A pension is just one way of saving for retirement. However, it is generally regarded as the best option for most people because of the tax breaks.
Why you really do need a Pension
Men in the UK can expect to live to the age of 81. That is, for 16 years after retirement. Women can expect to live for another 5 years - 86. At 26 years after, this is a long period to have to survive. These life expectancies are growing higher all the time as quality of healthcare in the country improves.
'But we have the State Pension', some people say. Sure, if they are content to live on just over £100 per week. Ask yourself if you are likely to need more than this. Most people will nod 'yes, definitely!'. Then you had better get cracking and begin a retirement plan without delay.
Pensions are the obvious and easiest way to start a plan. Remember that interest on your deposits compounds. So that any delay now could cost you a lot later on.
The Pensions Commission warned around four years ago that 9-12 million people - up to 40% of the workforce - were not saving enough for old age, in the most detailed analysis of the pension system in years. Three quarters of this group have no pension savings at all, according to research by the TUC. Millions of people are heading for a miserable retirement.
Watchdogs, the government and the media are constantly trying to wake people up to this fact. If you don't want to rely on the State pension, you need to start a private pension plan as soon as possible.
Sadly the pension selling scandals in recent years have not helped people's confidence. But, ironically, in many ways the pension saver is arguably now safer than ever thanks to all the subsequent tightening up.
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