Your New Year Resolutions: In all our personal, yearly resolutions, one very important item to consider is our Pension Planning. Unfortunately, this tends to take a back seat because our retirement is in the future. You should promote your Pension Planning to your “very important-resolution box” or you’ll risk having a very mediocre financial life at retirement as you reach an age too old to change the situation.
What is a Pension Plan?
Life does not remain static, so to maintain a reasonable Standard of Living when we retire; we need a Pension Plan. A pension plan is a retirement plan that provides you with a monthly income after you stop working i.e. when you retired from your working position. The amount you get will depend on how much you set aside (contributed) into your pension fund during your working life.
Your pension plan should be individually customized to you and your specific retirement aspirations. Your retirement aspirations should take into account possible external factors that may come into play and affect the amounts you get when you retire, items such as future economic situations and inflation rates over the period before you retire.
Each of us has different milestones in our lives and has all been impacted by the protracted Global Pandemic. This month, a new year with new and renewed hope should be a good reason to review our Pension Plans and our savings goals and adjust them where needed to safeguard our financial future. For those who haven’t yet embarked on planning their retirement, this is a good time to start.
This article is to give you a brief description of the different types of pensions, to help you have a better understanding of pension schemes. Bearing in mind that this is a very specialist area, we recommend that you discuss this with an expert, a Chartered Financial Planner, who will help you get the best, that is specific to your needs.
There are three main types of Pension Schemes
- The State Pension: The current UK eligible pension age (for men and women) is 66 years. You can claim a state pension when you reach this age. The state pension age is scheduled to rise to 67 between 2026 and 2028 and will probably increase in the future. State pensions are paid only to eligible recipients. Eligibility is built up through National Insurance contributions. To qualify for a full state pension, you have to have contributed for thirty-five years. A lower number of years can also qualify but will receive a lesser amount which is worked out on a prorated basis, minimum being ten years National Insurance contributions.
- The Workplace Pension: is done through one’s Employer. Every employer must enroll its employees in a pension scheme whereby the employee and employer contributes to the scheme. There are two types of workplace pensions namely, “Defined Contribution Pension” and “Defined Benefit Pension”. A Defined Contributor Pension allows you to pay in to build up a Pension Pot. Over time, the fund is invested in different asset classes for long-term growth. Your pension income will depend on the amounts contributed plus any investment earnings on the money in the account and on how well the underlying investments perform. A Defined Benefit Pension on the other hand pays you a guaranteed, specified pension payment, lump-sum or combination. It is called ‘defined benefit’ because the benefit formula is defined and known in advance.
- Personal Pension: These are for self-employed individuals. They are like Defined Contribution Pensions with some specific differences such as no contributions will be coming from an employer as these are for self-employed people. You can also choose the underlying assets that you want your contributions to be invested in and you can stop and start your contributions by taking a contribution holiday.
There are numerous types of Personal Pension Schemes available, so you need to carefully review them with An Expert before engaging in one. The Pension scheme performance is important and the one chosen should meet your specific needs.
Governments Gifts & Incentive Through Pension Tax relief
The attractiveness of pensions over other saving schemes and investments is the Tax Relief! The Government will refund a percentage of the money you have paid in tax on your earnings into your pension pot. Tax relief is paid on your pension contributions at the highest rate of income tax you pay. This means that a basic-rate taxpayer will get 20% pension tax relief; higher-rate taxpayers can claim 40% pension tax relief and additional-rate taxpayers can claim 45% pension tax relief.
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Can you set up a Personal Pension?
Yes, you can take out a personal pension scheme. Your annual allowance, the most you can save in your pension pots for this tax year 2021/2022 (6 April to 5 April) before you have to pay tax is £40,000. You will pay tax if you go above the annual allowance.
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How does one access their Personal Pension?
After age 55 you are eligible to receive your Pension if It’s a Defined Contribution Pension. Bear in mind that the earlier you access your pension fund, the less time it will have in which to grow; which means less money in your pension pot. Many people, therefore, wait until they are in their 60s before accessing their pension fund.
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Will you pay tax on pension income?
You won’t pay tax if your total annual pension income is less than your Personal Allowance (currently £12,570). Everyone is eligible to take up to 25% of the amount built up in their pension as a tax-free lump sum. The tax-free lump sum won’t affect your Personal Allowance, but tax will be taken off the remaining amount before you get it.
Consulting a Pension Expert:
Because of the complexities of Pension Planning, we advise that you consult a Pension Expert who will help guide you through the process. Once you have given serious consideration and decided the Standard of Living you wish to maintain in retirement, the Pension/Financial Adviser will help you design your personalized Pension Plan.
Is your Pension Plan sufficient to sustain you when you retire?
Generally speaking, the State Pension is basic and will only provide the safety net for basic amenities like food and basic clothes. It is therefore important to decide what your retirement aspirations are and carefully work out what amount you will need to accrue to achieve it, over your specified period.
Common Mistakes we make before Retirement
Because our retirement is in the future, people make mistakes such as
- Failing to consult with an expert adviser about a comprehensive Pension Plan. The earlier you do this, the better. Click Here to find out more
- Failing to fully consider dependents when pension planning.
- Assuming that future costs of living and costs of services will remain the same.
- Expecting the children and grandchildren to supplement or support you financially when you retire.
- Not starting one early enough in life.
Government help if one has no retirement fund
Every UK citizen who made National Insurance contributions is guaranteed a pension once they have worked for the required number of years. Currently, the state pension amount is £179.60 a week. The state pension will increase by £290 per year from April 2022, in line with the September inflation rate of 3.1%. This new £290 increase will raise the state pension amount to £185.15 a week.
Other benefits you can receive at State Pension age include
- Older Person Bus Pass
- Pension Credit
- Winter Fuel Payment
Finally, there is so much to navigate with Pension Plans, whether you are just started on the job ladder or are close to your retirement age. This article aims to shine some light on this important topic, enough to explore further it further with an Expert Adviser, who will help you design a Personalized Pension Plan to aid in fulfilling your aspirations.
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You can also check out our other articles on Wellness, Business Insight, and Personal Growth by Pat Clough
