NONE of us likes missing out on
the good things in life – especially
when they can help us financially.
But if you’re not already saving into
a pension, you could be missing out
on valuable contributions from the
government. You’re also missing out
on the chance to save for your future
in a way that you can afford.
The longer you delay, the more it
will cost you to catch up. Some of you
may be thinking about relying on the
government to support you in your
later years. Or you might have assumed
your employer will help you.
However,
this article will show why it’s
important to
take control
of your own
financial
future and to
strongly
consider pension contributions as a
means of saving for retirement.
Can you afford to rely on the
government?
When you reach your retirement age,
you’ll be entitled to support from the
Government which could include the
basic State pension – but will this
actually be enough to support you?
For the 2012-13 tax year, the weekly
basic State pension is: £107.45 for a
single person, £171.85 for a married
couple (source: www.directgov.uk).
Will you rely on your
employer?
If you’re employed, are you thinking of
relying on your employer to start
making contributions into a pension scheme for you?
You may have read in one of my previous articles about a government
initiative called “automatic enrolment”
that will affect all employers and their
requirements to provide pension
contributions for staff members.
Under the new scheme and being
phased in over the next few years,
employers will be required to enrol their
employees into a pension scheme and
make contributions on their behalf. If
you’re thinking of waiting until your
employer has to enrol you into a
pension scheme, this may not happen for several years and you could lose out
on years of savings – do you want to
wait for your employer before you start
saving for your future?
The tax efficiency of pension
savings
By not saving towards your retirement
via pension savings you could be
missing out on valuable contributions
from the tax man. Each time you make
a contribution into a pension plan, the
government will also make a
contribution on your behalf. So, for
example, if you decide to pay in £160
each month, you will also receive tax
relief of £40 in addition to your
contribution.
Your monthly contribution of £160
plus tax relief of £40 makes a total
contribution of £200.
In addition to this, higher rate
(40%) and additional rate (50%)
taxpayers will be able to claim
additional tax relief via their tax returns.
It is always worth remembering that
the tax advantages currently available on pension plans can help towards your
retirement savings, but they may change
in the future.
The flexibility of modern day
pension schemes
Those with concerns that a pension
plan is a long-term savings contract
with little to no flexibility to factor in
changing requirements will be pleased
to know that modern-day pension
schemes are very well suited to the 21st
century individual.
Most “new age” personal pension
contracts are highly flexible. This
flexibility means that the plan can
adapt to your changing needs and
lifestyle. Many also provide you value
for money, which means the more
you save the lower your charges could
be.
Flexible savings are also facilitated
through the modern-day pension
plan. Most allow you to increase,
decrease, stop and restart your
contributions anytime – free of hassle
and extra charges.
As well as making regular pension
contributions you can also boost your
retirement savings by making single
contributions or transferring existing
pensions into your plan.
Taking your retirement
benefits: the choices
available
Under current pension legislation you
can start taking your retirement
benefits from age 55, even if you’re
still working.
Currently, you can take up to 25%
of the value of your plan as a tax-free
cash lump sum. You can use this
money anyway you want – you could
take a holiday of a lifetime, pay off
your mortgage, or simply have extra
money to meet the cost of living. The
rest of your plan is used to provide
you with a taxable retirement income
– and you have several options as to
how to take that income.
Option 1: Buying an annuity
You can receive an income by buying an
annuity with the value of your plan. An
annuity is a financial product that
provides a guaranteed retirement
income for life in return for a lump sum
payment.
Once you’ve bought an annuity you
can’t alter it, cash it in or buy a different
one. You can buy an annuity from any
pension provider you like and don’t
have to stay with the current pension
provider. By shopping around, many
individuals receive a much higher
pension income so it always pays to
review your options.
Option 2: Income drawdown
Alternatively, instead of purchasing an
annuity, many modern-day pensions
allow you to take tax-free cash and
income payments directly from your
plan without the need to buy an annuity.
This facility is called “income
drawdown” and gives more flexibility
over how and when you take your
retirement benefits.
Income drawdown offers you:
- the freedom to access your retirement
benefits from age 55; - the ability to stay invested and
potentially benefit from further
investment growth; - potentially improved death benefits
for your spouse or dependents; - increased flexibility to alter your
income depending on your
requirements; - to draw down your tax-free sum in
one go or in multiple instalments.
Income drawdown can be a highly
efficient way of taking pension benefits
in retirement. However, it is also fairly
complex and carries more potential risks
than annuity purchase. If you’re
interested in the income drawdown
facility then it is highly recommended
that you seek independent financial
advice to ascertain whether this is
appropriate for you and your specific
objectives.
