The good news is that increased life expectancy today means that most people of working age can look forward to a long, healthy retirement. Pensions help you to save so that you can afford to enjoy your retirement.
In the 1950’s the average retirement lasted just 10 years, whereas the life expectancy for a 65 year old retiring today is 23 years. Whilst most people should receive State pension this is unlikely to be sufficient to meet your needs unless you are very frugal. Further State pension age is rising, currently 66, with planned rises to 70. If you want to ensure you have a decent standard of living when you retire, you should start saving now.
What is a pension?
A pension is simply a tax efficient way to save for retirement. Because the Government wants people to save money in preparation instead of relying on the state, there are some very generous tax breaks to encourage pension saving.
Pension Tax Benefits Explained
You get full income tax relief on the money you put into pension up to an annual allowance of £40,000 (2015/16). With a personal pension contract the pension provider reclaims 20% tax relief from HMRC on your behalf. This means that for every £80 you put into your pension, the pension provider will reclaim £20 giving a total of £100 into your pension! If you earn over £42,385 and are a higher rate tax payer, you are eligible for another 20% which you can claim back by contacting HMRC. Additional rate tax payers can get up to 45% tax relief – making pensions a very attractive way of saving for your retirement.
When you come to draw your pension from age 55 when you can take 25% of your pension fund tax free as a lump sum, known as the Pension Commencement Lump Sum. The rest of the fund is subject to income tax, whether you take it as a lump sum or buy an annuity or through drawdown.
Types of pension contracts
Personal Pensions are a type of defined contribution plan – this means that the value at retirement is dependent on the contributions and the investment performance. Some older personal pension contracts such as Retirement Annuity Contracts have guarantees in the form of Guaranteed Annuity Rates or Guaranteed Fund values at maturity, which can be very valuable when you come to draw your pension.
Modern personal pension contracts offer a wide range of investments, provide on-line access so that you can view and monitor your pension and issue annual statements with projections showing what your pension plan should be worth at retirement.
How much should I save in my pension?
The earlier you start the easier it will be to save, as you are giving your investment longer to grow. A popular rule of thumb for someone starting saving or with little other provision is half your age as a % of your earnings. So if you are aged 20 this would be 10% of your earnings and if you were aged 30 this would be 15% of your earnings. However this is merely a rough guideline and deciding how much to save into pension is a decision that should be taken within the context of your overall financial situation taking into account personal circumstances, other savings, desired income at retirement and many other variable. This is why it is so important to discuss your personal situation thoroughly with a qualified Independent Financial Adviser.
How Aspect 8 can help
Whether you are looking to set-up your first pension, or review your existing pensions we will be happy to help.