Retirement is seen as the longest self-funded holiday we take. Making sure you have money put back and a plan for when you retire is key if you want to be able to spend those twilight years enjoying all that life has to offer.
Why would I want a private pension?
Depending on your national insurance contributions as a taxpayer throughout your working life you will be eligible for a state pension, paid to you by the government when you reach state pension age, something which is under constant government review due to increasing life expectancy. You can read more about state pension ages and the proposed changes on the government website here.
The maximum current new state pension allowance is £179.60 per week, something which you may feel if not enough, particularly if you have missed national insurance contributions in the past. This is where private pensions come in and this blog will help you better understand the types of private pension and how they work.
What types of private pension are there?
There are two main types of private pension; defined benefit pension and defined contribution pension. Let’s look into each of those in a bit more detail:
Defined benefit pensions
This type of pension tends to be arranged by your employer and therefore is also known as a workplace pension scheme. A small amount of your monthly income will be put into the scheme straight from your pay. The amount you receive from workplace pension schemes will depend on the rules of the scheme as well as your salary and how long you worked as an employee.
Workplace pensions usually give you a certain amount of money each year, with 25% eligible to you tax free. However, the age at which you can take your workplace pension will depend on the rules of the pension scheme you entered. It is usually age 55 at the earliest but check with your workplace pension provider if you are unsure.
Auto enrolment is common for workplace pensions but you can choose to opt out if you decide that you could better invest the money from your salary or wish to put the income into a personal pension fund instead. Again, check the rules of any scheme available to you before making your decision.
Defined contribution pensions
These are usually personal pensions or stakeholder pensions, set up by you the individual, where the contributions put into your personal pension will be invested in a variety of ways including in the stock market, property and bonds, meaning that the value of your pension pot can fluctuate. This fluctuation can also depend on how much risk you’re willing to take, with providers often moving your money into lower-risk investments as you near retirement. Make sure you discuss this with your pension provider or independent financial advisor before committing to a private pension scheme.
The amount you can receive back from your pension pot will depend on the performance of the investments made from the money in your pension, whether you decide to take your pension income as regular payments or as a lump sum and, of course, how much was paid in in pension contributions in the first place. Money in your personal pensions pot will, however, accumulate free from capital gains tax.
With a personal or stakeholder pension in a defined contribution pension scheme you will able to take 25% of it tax-free from when you retire or from age 55. A small amount of the money from your pension will be paid to the scheme provider as a management fee.
How is my private pension paid to me?
After paying pension contributions into a defined contribution pension scheme you will need to decide what to do with your pension pot as you approach retirement. One common option is to buy a lifetime annuity. Annuities provide a retirement income for life and can be purchased from any pension provider not just the provider you have your pension with at the time.
As always there are limitations; annuities have limited flexibility once purchased and the rates can increase or decrease based on the stock market or economy. There are also plenty of other options including drawdown for income or defer income.
There is lots of advice on what to do with your personal pension pot once you are nearing retirement age on Age UK via the pensions advisory service from the government here on the Pension Wise website, including information on avoiding scams or, as always, do speak to us here at Coast Financial for unbiased financial advice.
How can I get help to decide which private pension option is best for me?
Speak to a pensions adviser. Here at Coast Financial we can give you unbiased advice on all types of private pension plans and their suitability for your circumstances. You can find out more about private pension on the Coast Financial pensions page and watch our YouTube video with more information about retirement. Alternatively, get in touch if you’d like any personalised advice, either setting up your personal pension or deciding what to do with your pension pot as you reach retirement.