A simple guide to pensions
Filed under: Pensions
Pensions can be very confusing, though. That's why we've come up with a simple guide to the subject to help you navigate you way through the complicated jargon.
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What will I get from the state?
There are two parts to the State Pension, the Basic State Pension and the Additional State Pension.
Most people are entitled to the Basic State Pension once they reach the State Pension Age, which depends on your date of birth but is likely to be between 65 and 68 for anyone who has not yet retired.
The amount you receive depends on how much National Insurance you have paid during your working life. Consequently, people who have taken career breaks may not be entitled to the full amount.
The Additional State Pension (also known as S2P - or previously SERPS) is only paid to workers who have paid Employees Class 1 National Insurance Contributions (Nics) on actual or deemed earnings.
When will I get it?
Your State Pension Age, which is the earliest point at which you can draw your State Pension, depends on your date of birth.
For anyone retiring between now and 2018, it is likely to be 65 - whether you are male or female. If you are due to retire between 2020 and 2034, then your State Pension Age will currently be 66, while those retiring after that will have to wait until they are 67 or 68 to claim the State Pension.
What is the Pension Credit?
The Pension Credit is a means-tested social security benefit that is designed to provide older Britons with a minimum level of income, and reward those aged 65 and over with extra cash to supplement the modest incomes they get from their retirement savings.
What is contracting out?
It is possible to opt out of the additional State pension by redirecting your NICs to an occupational or personal pension scheme - a process known as 'contracting out'. Whether you would benefit from contracting out depends on your individual circumstances such as your age, earnings and pension provision. It is vital to seek independent professional advice on this issue as a result.
What about personal pensions?
With a personal pension, you pay regular monthly amounts or a lump sum to a pension provider that invests the money on your behalf. The fund is usually run by a financial organisation such as a bank or insurance company.
Do I need one?
Whether or not a personal pension is right for you depends largely on how much you can afford to save for retirement and how much income you can expect from any other pensions.
If, for example, your employer offers a company pension scheme or a stakeholder pension scheme into which it makes an employer contribution, you will usually be better off increasing your contributions to this fund. But if not, a personal pension offer generous tax breaks and is therefore a popular vehicle for retirement saving.
How do I choose a personal pension?
There are a number of factors to consider before getting a personal pension. These include how the money will be invested, the provider's charges and how much you can afford to save.
If you think you may need to stop and start your payments or vary the amount, for example, you might consider a stakeholder pension. Other options include Self-invested personal pensions (Sipps), which offer greater investment freedom and are a good choice for more experienced investors.
Whichever you choose, you will also have to decide how to turn the cash into an income stream once you retire. The most common way to do this is by buying an annuity.
What is an annuity?
An annuity is a contract with an insurance company that provides a retirement income - in the form of regular payments - for the rest of your life.
Members of defined contribution pension schemes, such as money purchase, personal pensions and stakeholder pensions, can use their accumulated fund to purchase an annuity once they are 55.
A lot of people buy an annuity from their pension provider. However, you can significantly increase the income you get by shopping around so it is sensible to compare the whole market before making your choice.
What are the other options?
Income Drawdown allows you to take an income from your pension fund while the fund remains invested and continues to benefit from any fund growth - or suffer should markets fall. You generally need a substantial fund value, say at least £100,000, for this to be an option.
The risks involved also make it crucial to discuss this with an independent financial adviser before taking the plunge.
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