Most of us know pensions are important, but we can still find ourselves asking 'what actually is a pension?

A pension is a tax-efficient way to save and invest money over the long-term.

When you feel the time is right for you to scale back how much you’re working or if you choose to stop working completely in your latter years, you’ll need a private pension to fund your lifestyle otherwise you’ll rely on the state pension.

Once you reach the ages between 55 - 57 as of April 6, 2028, you have the option to begin taking your pension.

What are the main benefits?

•  Tax benefits

Consider a pension as a long-term savings strategy that also offers tax benefits. Any money you put into your pension will receive tax relief from the government, helping to put more money in your pocket.

When you retire, there are tax advantages as well.

Currently, you can withdraw 25% of your pension fund as a tax-free lump sum after you reach retirement age, which is at earliest 55. The remaining money can be distributed to you as income and subject to normal tax rates.

• Anyone can contribute

Whether you are employed, self-employed or unemployed, you are eligible to have a pension plan. Others may also make contributions to your personal pension plan in addition to your own.

If you have a job, your employer may contribute to your personal pension plan.

If your spouse is unemployed, you may choose to make contributions to their pension plan to assist them in saving for their retirement.

If you want to give a child a head start on planning their long-term financial future, you can also support their future pension.

• Guaranteed retirement income

Currently when you reach retirement age, you can withdraw up to 25% of your pension as a tax-free lump sum and the rest as taxable income.

Another choice is to purchase an annuity with the money from your pension to ensure a steady income during your retirement.

An annuity guarantees you income for life, or for a predetermined period, by transforming your investments into an annual income.

• Watch your investment grow over decades

The earlier you start contributing to a pension, the longer your investment has time to grow.

The money you contribute to a personal pension is invested in a wide range of assets and funds. This should generate growth over time, building up a pot of money that you can access from the earliest age of 55. The value of the scheme at retirement will depend on how much you have contributed and the investment growth on those contributions.

From 6 April 2028, the normal minimum pension age will increase to 57. So, from 6 April 2028 you'll need to be aged 57 or older before you can start taking money from your pension. There are still some circumstances where you can take money earlier, such as if you're suffering from ill health or have a protected pension age.

Many financial institutions provide risk assessment questionnaires to help determine your risk profile. These questionnaires typically ask a series of questions about your financial goals, investment experience, risk tolerance and capacity for loss.

• Investment experience - it is important for any adviser to understand your previous experience of financial services and products.
• Risk tolerance – this determines the rate at which your funds grow. Often termed, your ‘appetite for risk’, this guides the investment strategy for your pension funds. That’s why it is critical that you establish how you feel about investment risk in relation to the investment objective and that you are comfortable with the risk attached to any proposed investment vehicle.
• Pension fund investment risk – this comes in three main forms:
  • risk that the fund will fall in value
  • risk that the pension fund's returns will not keep pace with inflation (ie making real returns negative)
  • risk that the pension fund does not perform well enough to keep pace with the growth in the cost of providing a pension.
• Capacity for loss - having identified your attitude to risk, you should consider your capacity for loss when investing any money. That is the amount of money you could actually afford to lose when making your investment.

The value of your pension savings can still be affected by changes in the investment markets at any time, as they can go up and down daily. The value of your pension might therefore go up and down too. This is investment risk, a normal part of investing.

It really pays for you to pay attention to how your pension is invested.

Let us help you get your pension right whether you’re starting out or need help interpreting whether you’re on track to achieve the retirement goals you have in mind.

We believe, everyone deserves a secure financial future so whatever your question, guidance or advice that will help you achieve that future, call 0121 285 8528 to chat with one of our advisors.

 

 

Disclaimer: a pension is a long-term investment. The fund value may fluctuate and can go down. 

The purpose of this communication is to provide technical and generic information and should not be interpreted as a personal recommendation or advice.

 

Picture Source: 

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