Pensions: Prepare For and Protect your Future

Choosing a particular pension scheme may be down to individual choice, but saving for such should be embraced by anyone who would like to have the possibility of financial assurance when they reach their retirement.

A pension is a tax-efficient way of saving for the future, and it doesn’t matter whether you are young or old, there is never a wrong time to start saving for one. However, because there are so many different options it can be confusing trying to pinpoint the right pension for you and your particular circumstances. Of course, taking independent financial advice is one route to securing the best pension for you, but if you want to make your own decisions, what is out there?

In their very basic forms there are two types of pension; state and private. Currently, a state pension is paid to qualifying UK residents who reach retirement age and the amount received is based on the amount of NI (National Insurance) contributions made throughout that individual’s working life. Although, in 2009 men receive state pension at 65 and women at 60 years of age, by 2020 the age will be 65 for both, with a gradual phasing in starting from 2010.

However, the levels of payout under the UK state pension are inadequate for the majority of people to live in comfort throughout their latter years, and therefore contributions into private pensions - either personal or corporate - are recommended by the government and pensions specialists alike, in order to supplement the state pension income.

Corporate pensions are provided by employers who act as the middle man between the employee and the pension scheme provider; however the employee has a direct contract with the pension provider. In most of such schemes, both employee and employer will make contributions to the pension fund which is invested - normally in stocks and shares - and the fund should grow. Bear in mind, however, that investments can go down as well as up before the employee’s retirement. This is known as a money purchase pension and under such a scheme, at the point of retirement there is the option to take a tax-free lump sum and the rest of the fund is used to secure an income, normally as a lifetime annuity. There is also the option to make additional contributions to a group pension scheme, up to a maximum limit, known as Additional Voluntary Contributions, which will boost the value of an individual employee’s fund.

If not a member of a group pension, then a personal pension is an individual’s private fund that will continue regardless of your employer and is especially relevant for self-employed workers. However, the above is a very brief explanation of the main types of pension available and if you are thinking of starting a pension fund then it is recommended you seek more information or the help of a specialist.

Warnings

• The above is based on our understanding, as at June 2009, of current taxation, legislation and HM Revenue & Customs practice, all of which are liable to change without notice. The impact of taxation (and any tax reliefs) depends on individual circumstances.
• The rate of growth of funds cannot be guaranteed. Past Performance is not a reliable indicator of future performance.

This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice should always be sought and any links contained within this article are included for information purposes only.