Things You Really Need To Know About Your Pension

pension plan

Pensions are a type of savings for one’s retirement and can offer tax advantages. When the beneficiary retires or reaches the designated age of retirement, the basic pension begins to pay a regular income that continues for the remainder of one’s life.

Many businesses are obliged to give employees access to a retirement plan or point them to a financial advisor who can help with the details of all the options that are available.

How Much Pension is Needed?

The size of your pension is a big question. It needs to be as large as is affordable, but the following tips can help to provide a general idea of what will be needed:

Judging your future financial requirements is difficult, especially if retirement is many years away. However, if you consider fixed expenses, including food, taxes and utilities, add leisure activities, such as trips to the theatre, holidays and eating out, it should be possible to estimate your monthly expenses.

Consumers should remember that although they might currently be paying a mortgage or rent, this may no longer be true at the time of retirement. In addition, most retired individuals have lower expenses as they no longer need to meet the costs related to their work, including proper clothing and commuting expenses.

Once a basic figure for the expenses is determined, it is time to speak with an independent financial advisor or other expert in the field to ensure your needs can be funded. Online pension calculators can also be used to get a quick idea of the finances needed.

It is important to remember, that thanks to compound

interest, the earlier the pension is started, the less willneed to be paid monthly to reach a target income.

State pensions

At one time a state pension provided all that was needed to retire. Today, the value and stability of a state pension has eroded, so much so that it barely offers a living income, even if the recipient has no mortgage or other major bills to pay.

Unless you want to spend the remainder of your life counting each penny, it is necessary to take steps that provide a more adequate provision for your retirement years.

The amount of a government pension received depends on the contribution levels made during your working life to National Insurance. Even if the levels are high, if you have not paid the NI enough qualifying years, the full amount may be reduced.

Company pensions

Many businesses provide their own retirement scheme, and it is advisable to sign up, especially if one does not have an alternative provider. The following types of schemes are most common:

•Salary related pensions are based on your salary and the years enrolled in the scheme. In general you make a higher contribution during the working years.

•Money purchase pensionsare based on the amount paid into the scheme and the performance of funds. This scheme allows you to buy income for life, called an annuity.

For best performance, company schemes require regular contributions based on a portion of your salary. Some employers may make an additional matching payment. In addition, it is sometimes possible to make extra contributions on your own to improve the final benefits of the pension througha State Earnings Related Pension Scheme (SERP).

Contributions paid into a company scheme are paid before tax is deducted, allowing the individual to reduce his or her tax liability.

Schemes set out the conditions and terms defining when one can draw the pension. The plan administrator or external advisor can provide the specifics of the pension plan and all the details relating to it. It is usually a good idea to sit down with the administrator and go through these details early on so that you are fully aware of what benefits and drawbacks you can expect to come across.

Personal Pensions

There are options other than conventional schemes. Investors might place money with a trusted provider or choose another alternative to invest the funds to provide retirement income.

Many of these companies are brick and mortar and may involve leasing multiple properties to offer a regular income or downsizing to a smaller property in order to release funds. While the housing market offers a relatively stable investment, it also has peaks and troughs that are often based on factors one cannot control.

For those wanting to become very involved in planning their retirement income, the SIPP (Self Invested Personal Pension) plan allows one to work with the advisor in choosing how and where to invest money in saving for a pension.

The SIPP provides the larger range of options than other schemes being offered through the government, employer or self-investment. It also provides greater control over the investments that are being made for this cause.

With this scheme, investors are allowed to transfer funds from other pensions in order to consolidate and unify their savings.This makes it easy for the individual investor to manage the portfolio and provides greater ease in reviews of one’s investments toward retirement.

When combined with the fact that certain SIPP plans allow the investor to receive up to ¼ of their pension savings as a lump sum, that is also tax free, gives the individual greater control over the level of income initially derived and greater flexibility once reaching retirement age.

Certain SIPP providers may provide options in fund management, allowing an expert strategy to be designed for one’s individual objectives and requirements. These are a good option for those not wanting to oversee the most complex aspects of management of SIPP funds.

As all strategies of investment have some risk, it pays to investigate the potential before making a decision.

Avoid placing a large portion of your funds in any single provider or solution. Spreading your investments across more than one type of solution reduces the amount of risk you are exposed to.

Unless you are an expert in the field of pensions and investments, it is best to seek expert advice before a decision is made. Churchwood Finance offers a wide range of debt solutions including Debt Management Plans, Individual Voluntary Arrangements, Protected Trust deeds, Debt Relief Orders and Bankruptcy.

 Author bio

Lee Hill is head of content at IPIM he regularly blogs on debt and finance and when not at his computer he can usually be found out running or cycling.

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