Planning your pension: what are your options?

Whilst you might be thinking retirement is a life time away, it is never too early to start contributing to your pension – and thanks to increased media coverage and government schemes, our pensions have been placed at the front of our minds. However, the question is: do you know your options? Following a recent survey by personal pension provider True Potential, 57% of over 55s didn’t know how they would access their pensions.

Securing a comfortable retirement

If you have worked all of your life, you’ll be looking forward to living a comfortable retirement doing things you haven’t been able to do whilst juggling a work schedule. The amount you’ll need in retirement depends on numerous factors, including the quality of life you want to have. According to True Potential, to live comfortably during retirement, you’ll need £23,000 a year in retirement. This is almost four times the £6,000 Brits are on course to receive each year.

It is likely that you will need your pension pot to secure your finances for around 20 to 30 years – as it is clear that you will require a substantial amount. When deciding how much you’ll need, remember that your outgoings will likely be significantly less in retirement, as your mortgage could be paid off, children will have left home and you won’t be commuting into work each day.

Don’t forget about your State Pension either – this could give your pension pot the little boost that it needs. The State Pension rate is £7,582 per year as of April 2016, which works out at £151 per week. Remember that you’ll need to reach State Pension age before you can access these funds — this age is currently 65 for men and between 60 and 65 for women, although it is expected to rise in the coming years.

What types of pensions are available?

Your pension should be unique to you, whilst there are several options available, you should choose the scheme that best suits your individual needs.

Personal pension

With a personal pension plan, you can contribute to the pot on a monthly basis, and the money is invested to potentially grow over the years so you have a bigger fund when you retire. You have complete control over where and how it is invested.

Although you have complete control over how your money is invested, your contributions are capped on a yearly basis. Currently, you can’t contribute more than £40,000 per year – this is dependent on your salary however. Once you reach 55, you’ll be able to access your funds. This can be used to purchase an annuity—a regular monthly income until you die — or take a regular income using Drawdown.

You can also access 25% of your total pot tax-free as either a lump sum or smaller withdrawals.

Auto-enrolment

Employers can organise a workplace pension for their staff, which is also known as auto-enrolment. With this type of pension, you, your employer and the government contribute to your pension pot. At present, the minimum you can contribute is 2% of your earnings, whereby you put in 0.8%, 1% comes from your employer and 0.2% from tax relief.

In April 2018, the minimum contributions are set to increase to 5%, and then again in April 2019 to 8%.

To qualify, you’ll need to meet the following requirements:

  • Be over 22
  • Be under the State Pension age
  • Not currently in a scheme
  • Earn over £8,105 a year

Defined contribution pensions

There is a degree of flexibility with a defined contribution pension, as it can be paid into by an employer, employee or both and, as such, is a type of both a personal and workplace pension. Because the amount you pay in is invested, the amount payable in retirement is dependent on how much is contributed and the investment’s performance.

Defined benefit pensions

Often confused with a defined contribution pension, a defined benefit pension is quite the opposite type of pension. These are always workplace pensions. The amount you contribute depends on numerous factors, including your salary, how long you’ve worked for your employer and the pension scheme’s rules. This type of pension guarantees a set pension pot once you retire.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Tax rules can change at any time.