Pensions

Retirement may seem too far away to think about, but it comes round quicker than you expect – just ask anyone who’s retired. The earlier you start planning for your retirement the better off you’re likely to be, but it can seem a complicated subject, and it’s tempting to put off worrying about it. Our guide gives you a basic breakdown of the types of pension available and the pros and cons of each so you can start to get to grips with saving for retirement.

There are three main types of pension for you to consider:

State Pension

Once you reach the qualifying age, you may be eligible to receive a State Pension. The age at which you qualify is changing, so when you will be able to claim depends when your date of birth is. Visit the DirectGov website here for more information. You can put off claiming your State Pension if you wish, and this may increase the amount you are entitled to, or enable you to claim a lump sum later on.

Generally the amount you are entitled to depends on how many years worth of National Insurance contributions you have built up throughout your lifetime. These are built up during the time when you earned enough income through work to pay National Insurance, or were credited with NI contributions, for instance if you were a carer or in receipt of certain benefits such as Jobseeker’s Allowance or Employment and Support Allowance (ESA).

The additional or State Second Pension (also used to be known as State Earnings Related Pension Scheme or SERPS) may be available for you to claim on top of your State Pension. You may be ‘contracted out’ of this additional pension. This can happen if you have a company, stakeholder or personal pension.

You may be able to get Pension Credit if you are claiming your pension and are on a low income.

Personal Pension

Personal pensions are pensions you arrange yourself through a pension provider (often a bank, building society or other financial agency). The money is invested for you until you retire, when you will receive a regular income from the pension. The amount you receive will depend on how much you paid in, and as with any investment it may perform well or badly which will also affect the amount you are left with.

These may be a good option for those who are self-employed or for some other reason don’t have a company pension scheme available to them. More information on personal pensions is available here.

Stakeholder pensions are a type of personal pension which must meet certain standards that make sure they are fair and secure. As with other personal pensions, you invest money on a regular basis and your pension will then be based on how much you have contributed and how well the investments have performed. When you retire, you can use your fund to buy something called an annuity, which will then give you a regular income for life. For more information on stakeholder pensions, see this site.

Workplace Pensions

Your employer may offer a pension scheme which you will have the option to sign up to when you start work. These are sometimes known as occupational pensions. Usually you will pay in a percentage of your wages each month (you do not have to pay tax on any of your wages which go towards your pension) and your employer may also make a contribution.

These schemes can often be the best way to start saving towards your pension, however, you should remember that the scheme you join may ‘contract you out’ of the Additional State Pension, meaning you will no longer be entitled to receive this. For more information on company pensions, see this site.