It’s never too early to start preparing for the future. Having a pension makes great financial sense – it ensures that you can live comfortably after you’ve retired, and if you choose to put more in your pension pot now, you can reap the benefits later in life.
Don’t worry if you haven’t got a pension yet – it’s never too late to set one up. Here’s everything you need to know about them, plus a few common misconceptions debunked.
What is a pension?
Simply put, a pension is a form of savings product. Unlike other types (e.g. an ISA), a pension is designed to be accessed when you’ve retired, and not before. Over the years, you’ll pay money into your pension, where it’s invested on your behalf. This then increases the overall sum, and you’ll receive it when you reach retirement age.
When you can access your pension depends on what your retirement age is. Sometimes there are exceptions (for example, you might be able to access your pension early if you suffer from health problems).
What pensions are there?
The state pension is the most common form of pension. Everyone is eligible for this, and you’ll receive it as a regular payment when you retire.
If you’re in employment (and older than 22) you’ll automatically be enrolled into a workplace pension. That means that you’ll make contributions to your pension, which are taken from your salary. The government adds contributions to this too. Note – you can opt into a workplace pension prior to the age of 22, as long as you earn more than £490 per month.
The other major option is a personal pension plan. In order to choose a personal pension (like a SIPP) you’ll need to transfer your existing pension over. These pensions offer far more flexibility, plus the chance to make more money for your retirement. However, they’re not without their risks – so it’s wise to seek financial advice if you want to go down this route.
What are the advantages of a pension?
When you stop working, you’ll no longer get a salary. You’ll get a state pension, but this might not be enough to fund the lifestyle you want. That’s where an additional pension comes in useful.
Extra money in retirement can give you the freedom to travel, for example, or spend more time with the family. However, in order to enjoy life in the way you want, you’ll need to work out how much to pay into your pension over time.
Pension myths debunked
- My workplace pension will be at risk if the business goes bust
Don’t panic – workplace pensions are extremely well-protected, and you’re unlikely to lose your money, even if the company you work for does go bust.
- I don’t earn enough to pay money into a pension
It’s amazing how much even small sums of money can add up to over time. For example, paying in just £20 a month over the course of your working life can equate to £22,000 in your pension pot – and that’s in addition to your state pension.
- If I die before I reach retirement, my pension will be lost
Most pensions permit the funds to be transferred to your next of kin, if you die before the age of 75.
- My pension is paid out in one lump sum
That’s one option, but not the only one. You can also choose to ‘draw down’ on your pension, taking smaller amounts only when you need it. You can also select to be ‘paid a salary’ from your pension pot.
If you’d like to find out more about setting up a pension, get in touch with Elevate Financial Services today on 0203 8131 495.
A PENSION IS A LONG TERM INVESTMENT, THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST AND TAX LEGISLATION.