People these days are living longer and staying healthier well into their old age. Planning for your future past the working age is, therefore, an important consideration. Some people will spend a third of their lives in retirement. Although this may sound good on paper, it is essential to understand where the money is going to come from if you're not making a regular wage.
If you have made regular national insurance contributions throughout your working life, you will receive a state pension. However, currently this only amounts to £4,953 per year. Not really good enough if you are used to a five figure salary.
One of the better ideas is to join a pension plan. This way you are putting money you have earned towards a comfortable retirement. It is also one of the most tax efficient money-saving methods for the future.
Broadly speaking, there are two types of pension plans: an individual pension, and a company pension. We'll look into these in more detail.
An individual or private pension is set up independently of an employer or other body, for you personally. It can be an effective option, since you can keep paying into it no matter who your current employer is. The individual pension is further broken down into insured personal, stakeholder or self-invested pension.
With the insured personal pension scheme, you can choose from a range of investment plans. There are often over 1000 different options to choose from. A stakeholder pension scheme is similar but with charges capped at a low level, low minimum contributions, and some level of flexibility regarding starting and stopping contributions as your circumstances change.
If you still want more control over how your pension is invested, you can choose a self-invested personal pension, where the investment decisions rest with you. Naturally, this choice has more risks involved.If you are thinking of setting up an individual pension, you could speak to an Independent Financial Advisor about what is the best choice for you, and use a free online personal finance software tool to see how much you can afford to put away.
A company pension is set up by a company for its employees after they retire. This can be contributory, which means the pension payment comes out of the employee's salary before tax, or non-contributory, where the payment is made by the company in addition to the salary.
The final salary company pension scheme means the company will continue to pay the employee a proportion of their salary after retirement. Often this is a sixtieth of the employee's salary at the time of retirement multiplied by the number of years they have been employed by the organisation. Most employees prefer this pension scheme as the risk lies with the employer, not the employee. Final salary pensions have been the subject of news coverage recently as many large UK companies are no longer providing this pension to new employees and in some cases have frozen the pensions of existing employees.
The other type of company pension available, which is increasingly more popular, is the money purchase, or defined contribution scheme. In this scheme, both employers and employees contribute money towards the pension, but rather than going into a fund, the money is invested. The final amount you will receive will depend on how well the investment fared as well as the amount you paid into the scheme.
Which company pension is better for you depends on the individual. For example, a person who changes employer regularly might be better off with a money purchase scheme as it has greater flexibility. While others may prefer final salary, and there is less risk involved. However, the scheme is usually chosen by the employer, so it may not be your choice to make.