Pension and annuities

Planning for your retirement is an essential, otherwise at retirement you may find yourself in a situation where you do not have the funds to be able to live the life that you are used to or have worked towards. Contributing to a pension involves a long term commitment to pay into the pension pot over time and when done right can offer you a secure retirement where your lifestyle has not being compromised when you stop working or receiving an income from employment. It is essential for any one to taking out a pension to get advice and also to make sure that their pension is being reviewed on a regular basis ( At least once a year) this will ensure that the pension is working for you in a way that you expect it to. So many people leave their pension to run without any review and don’t realise that their pension isn’t performing its objectives until it is too late.

There are three main types of pension, the state pension, a personal pension or a company pension.

State Pension

If you have enough qualifying years within your national insurance contributions then you will be entitled to a state pension. The state pension should not be relied on for the whole of your pension income as it may not be enough to pay for all the things that you want into retirement. It is essential to plan towards your own retirement, earlier the better so please seek advice on this issue.

Company Pension

Company pensions are set up by employers to provide a pension for employees. Different company pensions have different rules and may vary into how the money is paid into them. Please speak to an advisor to ascertain what sort of pension you have and what your options are to contributing into it or taking benefits from it.

Personal Pension

Personal Pensions or private pension are a way of providing you with an income in to retirement. You usually pay monthly contributions or add lump sums into the pension fund where the funds are invested on your behalf.

Incentives for taking out a pensionTax Relief

The incentive for doing a personal pension is that the contributor get’s tax relief. For example if you are a basic rate tax payer and you invested £100 a month then you will get tax relief of £20. This means that you would only have to pay £80 yourself and the extra £20 is the tax relief received from the government. If you were going to put your money into a savings account then you would not get the tax relief. If you are a higher rate tax payer then you get a 40% relief.

Benefits of building up your pension pot

If you invest your money into a savings account then you will get a fixed rate of interest in return. When you invest in a pension then your money is invested mostly in stocks and shares which can provide higher returns then a savings account. There is more risk then a savings account but generally over time larger returns are made. The amount of risk that you take will depend on you, your age and your objectives. If you did not want to take any risk then there are funds that can be chosen to achieve this objective. Please speak to an advisor regarding this.

Benefits when taking your pension income

When taking your money from a savings account after you have spent it, it is gone. A pension is designed to give you an income for the rest of your life. There are also options to provide for dependants in the event of death. If you die before you have taken your pension then the pension can leave a lump sum, can refund all the contributions that have been made or can provide a regular income.

If you die after your pension has been taken then it will depend on the rules of the pension that you have taken on what will happen to the money.

Please get advice regarding the different ways of taking a pension income.

Tax Free lump sum

When you take your pension some pensions allow you take a tax free lump sum from your pension.

What happens if I stop contributing to my pension ?

If you stop contributing to a pension then your pension pot does not disappear. The fund will remain where it is and will continue to be invested. However it may not grow at the rate expected because you will no longer be contributing to it. You often have the option to be able to transfer your pension in to another scheme or a new scheme which may be beneficial, please speak to an advisor regarding this.

If you think you may have a small pension pot that you cannot find then there is a service available to trace old pension pots. Please speak to an advisor regarding this.

Who are Personal pensions for ?

Whether or not you decide to contribute to a personal pension will depend on your age and your objectives i.e how much retirement income you want. The personal pension is suitable for :
People who are not working but can afford to pay into a pension.
For employees whose employer doesn’t offer a pension scheme.
For employees who choose not to contribute to the companies pension scheme.
Employees who wish to top up their current pension income.

What you need to think about

Your planned retirement age.
Amount you can afford to contribute each month.
Whether or not your employer will contribute.
Amount of income that you will require into retirement.

Pensions are tailored to the individual and you need to be sure that you get the pension that meets your objectives. From where the pension funds are invested to making sure you get the right pension with the right benefits all require advice on how to make a pension work for you.

Do you already have a pension?

If you already have a pension, then when was the last time it was reviewed? Pensions should be reviewed on at least a yearly basis. It is essential to review so that you can ensure that your money is invested in the rights areas, you need to make sure that your pension is on target to provide your required retirement income and need to ensure that the pension is performing well. It is essential to make sure that your pension suits your attitude to risk and where you are in your life cycle.

Annuity

An annuity offers a guaranteed income for life which is purchased with your pension pot. Annuities can also be brought directly with cash. You exchange your lump sum for a guaranteed income for life. You don’t have to buy an annuity as soon as you retire you can hold off until you are 75 when you have to purchase one by law if it is being purchased from your pension.

It is essential to shop around when you purchase an annuity as different providers on different days will offer varying rates. It is often the case that those who do not shop around end up losing out on income.

There are numerous kinds of annuities for example annuities that provide incomes that increase to keep pace withy inflation and annuities that pay your spouse in the event of your death. Which annuity you choose will depend on your individual situation. Please speak to an advisor who will be able to go through your options with you.

There are other options to an annuity such as income drawdown which lets you take your income from your pension pot and you then purchase an annuity later on. You should discuss your options with an advisor as after you buy an annuity you can not change it.