It’s tempting to bury your head in the sand when it comes to thinking about the future and your pension: there’s so much to consider, and navigating the system can give even the money-savviest among us a headache.
New regulations which came into play last week should make things easier.
Here, we’ve rounded up the essential facts…
Put simply, this is a weekly income (currently just over £113 a week for a single person) which is paid out by the government to those who have reached retirement age (62 for women and 65 for men).
State pension is funded by National Insurance (NI) contributions, and how much you are entitled to depends on how much you’ve accumulated.
You may find you’ll need to supplement it with a personal pension, which is essentially a tax-free pot of cash that you, your employer, and sometimes the Government pays into, as a way of saving up. Once you reach retirement, you can draw money from this amount.
Many people choose to buy an annuity, which means selling the cash to an insurance company in return for a regular income.
By 2018, government legislation will be in place to ensure that every employer will automatically enrol workers into a workplace pension scheme. Anyone aged 22-65, who is not already in a pension scheme and earns more than £10,000 a year, will be included.
The amount put in each month by the employee will be doubled through a combination of employer contributions and government tax relief.
People who earn more than £50,000 a year will be stripped of their child benefit (if you have two kids, this could be up to £1,752.40 annually). However, paying into a pension adjusts your ‘net salary’ – if it dips below £50,000 then you’ll be able to keep the child benefit.
These come in all shapes and sizes, but it’s important to check whether the pension is ‘final salary’ or a ‘money purchase’. To get your head round the difference, check out Moneysavingexpert.com.
Workplace schemes and personal pensions allow you to take 25% of your savings as a tax-free lump sum when you retire, meaning you could take £25,000 out of a £100,000 pot.
If it seems too good to be true, it probably is. Fraudsters trying to persuade you to release cash early from your pension will likely saddle you with large fees.
Steer clear of cold calls/text messages, door-to-door ‘pension reviews’ and ‘one-off investment opportunities’.
It pays to start a pension as soon as you can. Take the pension your employer offers, because it effectively means an increase in your pay. Contributions from your employer can double or even triple the size of your pension pot over
the years. Opting out is a no-no – why refuse a raise?
You receive some tax back on the money you put into a pension, while any gains made from your money are largely tax-free. For example, a person on Basic Tax Rate will receive £20 Tax Relief on every £80 they pay into their pension, meaning £100 will be added to their pot. The tax relief is increased for Higher Tax Rate payers.
With thanks to money expert George Harrigan-Brown, follow him on Twitter @GWHBR.