14 March 2017
Reaping the benefits of a pension plan
There’s often an assumption that pensions only affect those nearing retirement age. But the sooner you put a pension plan in place the sooner you’ll be on your way to looking after your future finances. Here, Kate Murray, Principality Building Society’s Senior Savings Product Manager, explains why we should all consider our pension plan, as well as offering her expertise on making the most of it once it’s set up.
What is a pension?
In its most basic form, a pension is essentially a savings pot, specifically putting money away for retirement. The idea behind a pension is to save some of your income through your working life to aim to be able to either reduce your working hours or retire completely.
What are the advantages of having a pension?
Aside from protecting your finances, pensions benefit from a tax relief on the income you contribute, as long as the total contribution over a year doesn’t exceed your annual earnings or the annual allowance, which is currently capped at £40,000. A tax relief is a reduction on the amount of tax you’d normally be expected to pay. Importantly, making contributions into a pension has no effect on any other savings pots you might have, meaning you could also make great use of other tax-free savings schemes like ISAs. And regularly contributing to a pension can give you real peace of mind that you’ll be making the most of your money to help you enjoy the later years in life.
Are there different types of pensions?
There are several types of pensions available and each work in different ways, with the ultimate goal of helping you save and protect your funds for retirement. The first place most people come into contact with a pension is in their workplace, through a company pension plan which will be individual to your employer. These plans stipulate that you make a regular contribution every month based on how much you earn, which your employer will then match to a certain percentage. This will differ in every company, so if you move jobs you need to make sure you’re fully enrolled on to a new scheme or check whether you can combine your old pension with your new employer’s.
What are the new policies for auto-enrolment?
To avoid missing out on the benefits of a pension, the government is phasing in an auto-enrolment scheme, meaning it will be compulsory for employers to automatically enrol their eligible workers into a pension scheme. Starting with the larger companies across the UK, by 1st February 2018 everyone eligible must be enrolled. Your eligibility rests on if you’re age 22 or over, earning more than £10,000, not yet at State Pension age (60 for women and 65 for men until November 2018) and on the terms of your contract. Discuss it with your employer to be certain of how you’ll be affected.
Is there an age limit on taking out a pension?
Whether your 24 or 54, there is no age limit to starting a pension, although the earlier you begin one, the more money you will eventually have saved up to enjoy during retirement.
How can I make the most of my pension when I’m close to retirement?
Once you’ve set up your pension, it’s easy to make regular payments every month and essentially forget it’s there. But, as you reach retirement age, there is nothing to stop you increasing your monthly payments and making the most of the tax relief on offer. However, to avoid possible additional charges, it’s advisable not to exceed the maximum allowance per year.
Do I have to start using my pension as soon as retire?
Simply, no. In fact, deferring the use of your pension pot could mean this money is put aside for even further into the future. But there are several important things to work out before committing to this. Firstly, do you have enough income elsewhere or savings set aside that mean you don’t need to rely on your pension? And secondly, would the money be better off invested elsewhere? Claiming your workplace pension and investing it into a savings account could see it grow more efficiently than if you were to defer using the money. But remember, if you feel unsure about what’s best here, head to www.unbiased.co.uk for impartial financial advice.
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