Pensions
Investing for your retirement
Pensions are investments designed to provide you with an income to see you through your retirement in comfort. You will be eligible for tax relief on money paid into a pension, subject to certain limits set by HM Revenue & Customs. Currently the minimum age you can start withdrawing the benefits from a pension policy is 50, but this will be rising to 55 after April 2010. And it may be different with some types of pension, so if you plan to retire early make sure you check what the conditions are.
There are different types of pension available, some that your employer will pay into, others that you contribute to and some that allow both. There is also a Government pension scheme - the State Pension. But it's widely accepted that the State Pension scheme provided by the Government will not be enough to keep most people in a comfortable lifestyle when they retire, so it's important to look at other options to give you the retirement you want. The amount you will need to put away each month will depend on the amount of income you hope to draw from your pension, and how many years you have left until you plan to retire.
There are three main types of pension, which we'll explain in more detail below.
State pension
The State Pension is paid by the Government the amount you receive will depend on the number of years you've paid, or are treated as having paid, National Insurance Contributions before you retire.
The State Pension age is currently 65 for men and 60 for women. The State Pension age for women will increase gradually to 65 between 2010 and 2020. This won't affect women born on or before 5 April 1950. Women born between 6 April 1950 and 5 April 1955 will reach State Pension age between 60 and 65.
The State Pension age for men and women is set to increase again from 65 to 68 between 2024 and 2046. A full breakdown of how this will be phased is available from Directgov.
The rules of State Pensions are subject to change. For the most up to date information, including details on how to obtain a forecast that tells you how much you can expect to receive, including eligibility for Pension Credit, visit the Directgov website.
At a glance:
- Pension provided by the Government
- Unlikely to provide enough of income on its own for you to live comfortably when you retire
- Amount depends on the number of years you've paid, or are treated as having paid, National Insurance contributions
Personal and stakeholder pensions
Personal pensions and stakeholder pensions operate in similar ways. They are both types of private pension plan. The main difference being that a stakeholder pension has to meet minimum Government standards set out to cover charges, flexibility and information that must be regularly provided to you as the pension holder.
Unlike a state pension, the amount you will receive is not based on National Insurance Contributions. In fact, you don't have to be working to have a personal or stakeholder pension. The amount you'll receive is based on the amount you pay in, how long you pay in for before retiring, and how well the funds you invested in perform.
You can make regular (usually monthly) contributions or lump sum payments, or both. And you'll get tax relief on any payments you make into the fund. Your employer can also make contributions to these pensions if they choose.
There is a degree of flexibility in these pensions as you can choose to invest some or all of the money you contribute into a range of investment funds. This includes stock market-linked funds, property related and fixed interest security funds, so the value can go down as well as up. But as it's a long-term investment with the potential for a better return than a cash-only fund, you may decide its worth taking some risk.
You can start drawing on your pension benefits anytime after the age of 50 (rising to 55 after 2010) regardless of whether you're retired or not. Then you can choose to take up to 25% of your pension fund as a tax-free lump sum, using the rest to pay you a regular income throughout your retirement.
At a glance:
- Pensions with the option for employer contributions
- Tax-free lump sum option
- Flexibility to invest in cash and investment funds for higher potential return
Company pension scheme
The Government is planning changes to ensure that every employer has to offer some kind of pension scheme to their staff, with the minimum requirement being that they set up a stakeholder pension scheme. They are not required to contribute any money towards it, other than creating it and running it, but many do. So it's worth checking out what kind of pension provision your employer offers - all you will need to do is start paying into it.
Some company pension schemes will match the level of contribution you pay in, up to a maximum percentage of your salary. So if you agree to pay say, five percent of your monthly salary into it, they may pay in the same amount. The level of this is often based on your position, salary or length of service with the company. You won't be subject to tax on the portion of your salary that goes into your pension.
A company pension may offer other benefits including life insurance that pays a lump sum to your family if you die while still in employment, the option to retire early and draw on your pension if you suffer ill health, and pension payments to be made to your partner or other dependants when you die.
At a glance:
- Your employer may also pay into a company scheme
- Payments can be taken directly from your salary and are non-taxable
- There may be additional benefits such as life insurance