Retirement is great. Time to play golf, take lots of holidays, maybe spend some time with the grandchildren. It’s a time to relax and enjoy the fruits of decades of work.
Well, not if you’re skint. The UK’s population is ageing and there’s a general consensus that the country won’t be able to afford state pensions at the current (fairly low) levels for much longer.
Already the pension age is increasing, and it’s likely that the value of a state pension will start to fall.
So it’s vital that everyone starts to take responsibility for their own retirement. And fortunately, there’s plenty of help out there. Pensions and retirement planning can be complicated, so it’s always worth taking professional advice.
There are essentially two types of pension, known as defined benefit and defined contribution:
- Defined benefit pensions give you a set amount when you retire, normally a percentage of your final salary. They are run by your employer and, while you may be invited to contribute, most of the money to pay your pension comes from them. They are almost always the best option, so if you are lucky enough to be eligible, then you should snap up the opportunity. Sadly, however, they are being phased out in most organisations.
- Defined contribution pensions are now the most common. Here, you – and sometimes your employer – pay in a set amount each month. This is then invested by the pension fund and when you come to retire, you buy an annuity, which gives you an income for the rest of your life.
Paying money into a pension has huge tax advantages. Your contributions are tax free, so if you are a basic rate taxpayer, for every £100 you invest, you only have to actually pay in £80. If you’re a higher rate taxpayer, it’s even better – you only have to pay in £60 to get a £100 investment. Most people pay in a set amount each month, although you don’t have to with most funds – you can simply pay in what you can afford when you can afford it.
But of course it’s not perfect. For a start, you can’t take back any contributions you have made before you retire – the money you pay in can only be used to pay your pension, so if your circumstances change in the meantime, the money is still locked in. And secondly, there are no guarantees about how much you will make – the funds are invested in the stock market, which can of course go up and down, so there’s a chance you will lose out. But because it’s a long term investment, your fund should ride the peaks and troughs of the market to give you steady growth.
There are two key messages when it comes to pensions:
- The earlier you start saving, the better.
- But, it is never too late to start your retirement planning.
Starting early is a huge advantage – you don’t have to save as much each month, because you will be saving for longer and the money you put in early will have more chance to grow. But the tax advantages mean that no matter when you start, you should end up better off.
How much to save is, of course, up to you, and there are a number of online pension calculators that will show you how much you need to pay in to achieve a certain income when you retire.
A personal pension is not the only option for funding your retirement, although you’re unlikely to get the same tax benefits from anything else. In recent years, many people have invested in buy-to-let property, planning for the mortgage to be paid off by retirement and then living off either the rental income or the sale of the property.
Alternatively, you could simply buy shares, or invest in an ISA. Individual Savings Accounts also have tax benefits, in that you don’t have to pay any tax on the growth. Both property and ISAs are more flexible, allowing you to take out money if you need to before you reply.