Why it Pays to Have a Personal Pension
When you have a personal pension in place you can afford to dream about your retirement. For sSome, this couldmay be imagininge filling their later years with travel and adventure, while others may simply wish for a comfortable life without having to worry about financial mattersheadaches.
Unfortunately, however, research from MetLife shows that one in three older workers has failed to save a penny towards their retirement*. This is where the dream can turn into a nightmare for many, with money worries and poverty blighting what should be a relaxing and enjoyable period of their life.
As The report revealeded at thisismoney.co.uk, 32 per cent of workers over the age of 50 have no pension savings*. This means that these pensioners will be forced to rely on just a their state pension.
Theis pension crisis may also see many people having to continue work well into old age, when they should be sitting back and enjoying the fruits of their life-long labour.
There are many reasons why people fail to save for retirement. Scare stories mooted in the press about pensions underperforming may have put many off, as well as thesome general opinionpeople thinking that pensions are complicated and expensive to set up. In fact, pensions are surprisingly logicalsimple to set up, and the financial benefits of saving in a pension are considerable.
Essentially, a pension is simply a way of saving for retirement without being taxed on those savings into your pension. In fact, one major benefit of investing saving in a pension is that you actually receive generous tax relief on whatever your contributions save. As in all personal pension products, you will not be able to withdraw money until you reach age 55.
You pay Income Tax on your earnings before any pension contribution, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. If you pay tax at higher rate, you can claim the difference through your tax return or by telephoning or writing to HMRC. If you’re an additional rate taxpayer you’ll have to claim the difference through your tax return.
For every £80 that a basic rate taxpayer puts into a pension pot, the government tops this up to £100. This means that you are given an extra £20 for every £80 that you save.
The situation gets even better for higher rate taxpayers, with the government putting in £40 for every £60 saved. This is quite a generous incentive to save for old age. However, those who choose to save through salary sacrifice will also save on national insurance contributions, making the financial benefits even more appealing.
The money put invested into a pension pot is usually could be used to buy cash, bond, stocks and or shares. These investments could be low, medium or high risk, and a good pension pot will often include a portfolio of different risk level investments, in order to maximise gains whilst minimising the riskdiversify your portfolio.
Despite their reputation,P personal pensions are not difficult to set up. An investment specialist independent financial adviser will be able to guide you through the process, should you need investment advice or a helping hand.
For those who are confident with financial matterstheir finances and would prefer to select their own investments, a Self Investment Personal Pension (SIPP) is a great could be a suitable option. Dependent on your personal circumstances, you could also look at a stakeholder pension, contact your IFA for more details. Do remember the value of tax savings, and eligibility to invest in a pension, will depend on individual circumstances and all tax rules may change in the future.
SIPPs are completely DIY pensions which afford offer you great flexibility and control over your pension pot. Choosing a SIPP with an online account management facility is could be a good idea as you can easily keep track of your investment’s performance., and quickly and simply switch between funds.
Savers considering managing their own SIPP should be confident when it comes to choosing investments, and have the time to put into managing their own pension pot. Otherwise, a managed pension is likely to work out to be better value in the long run.portfolio. The challenge you will face is the value of investments can go down as well as up and you may get back less than you invested.
Whichever way you decide to save for retirement, the general rule is that the sooner you start the better. And oA simple calculation estimates that a 30-year old saving £100 a month in a pension may come out with a monthly retirement income of £500.
However, a 40 year old in exactly the same circumstances would have a monthly income of approximately £300.
Of course, the more you can save, and the earlier you can save, the bigger your pension pot is likely to be on retirement. This will mean that those dreams of around-the-world cruises may well become a reality.
About the author: George Pardew is a finance and personal pension writer.
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