Everyone will need to/want to retire at some point in their life. Whether or not you can afford to do all the things you imagine (holidays, dining out, having fun) will depend on you getting to grips with the scary world of pensions. Read on to learn all the basics that will empower you to understand whether you are on track or not.
What Is A Pension?
A pension is a special savings product that is designed to pay out for your retirement. Things you need to know:
- You can access your pension from age 55
- You get tax relief when you pay into a pension
- When you pay in the government will also pay in
- When you take the pension you can take 25% as a tax-free lump sum
- The remaining 75% is then used to create you an income and is taxable
- Even if you’re not earning you can still get free money from the government and pay in up to £2880 per tax year. The government will then top this up to a max of £3600 for you.
- You can pay in either 100% of your earnings or £40,000 pa depending on which is the lowest
- You can save up to £1m into a pension during your lifetime without being penalised.
Do I Need A Pension?
Do you want to retire? A pension is the most tax efficient way to save for your retirement and recent changes make pensions also more user friendly. However, this doesn’t mean that you have to save in a pension and that they are your only option. However before you dismiss pensions you need to consider:
- A lot of employers will pay into your pension if you do. If you don’t pay in you would be missing out on free money from your employer- don’t do that!
- What would you do instead?
The most important thing is that you act now and don’t underestimate how much you will spend when you are living the 7 day weekend and also how long you are likely to live.
How Much Should I Pay Into A Pension?
Firstly you should really have started contributing from your very first job. As you can’t rewind time; you are going to have to pay in more than perhaps you thought. No pain, no gain. As a general rule of thumb, you should pay in half your age as a percentage of your salary (Including your employer’s pension contribution). So if you are 30, you should be paying at least 15% of your salary each year.
Doesn’t My Employer Take Care Of This For Me?
The most likely answer is no, even if your employer is paying into a good quality scheme for you, the chances are you are going to need to top this up to the levels described earlier. If you look at your benefits handbook, you may find for example that you contribute 5% and the company contributes 5%. If you need to be paying in 20% only ½ of the job is taken care of for you. Most people vastly underestimate how much they need in retirement, and a general rule of thumb, is that for every £10,000 per annum of taxable income you need in retirement, you would need a pension pot of roughly £200,000-£250,000 to create this.
How Do I Know What To Invest In?
What to invest in as a long term strategy for your retirement depends on many things. The main one being your attitude to risk. A riskier investment is likely to gain more when things are doing well, but lose more when things aren’t. Therefore they are more volatile. The second thing to consider is not to have all your eggs in one basket i.e. you need to diversify your risk. Go to the investments tab