Pensions – A Summary (Part 1)
Whatever age you are, it is never too early to start thinking about saving for the future. Many people will find that their state pension will not provide enough income to sustain the lifestyle that they are used to. So how can this be prevented?
The first thing to understand is that there are many different options available in order to start saving money for the future.
The State Pension is provided by the government to everybody once they reach State Pension age. The amount you would receive (for the year ending March 2013) is £107.45 per week, and this is increased every year. For a long time, the State pension age was 65 for men, and 60 for women. However, changes are being introduced to increase this, up to 66 for both men and women by 2020, with further plans to increase it to 68 by 2046.
Of course, most people do not rely just on the State Pension – many open private pension schemes with financial institutions, or have a company pension scheme in place.
In a personal pension scheme, a defined contribution arrangement is common (the amount received when you start drawing money from the scheme is directly proportional to the amount you have deposited in it). The money you put into the pot is invested, and when you reach 55, you can buy an ‘annuity’ (an annual sum of money to receive), as well as typically receive 25% in a lump sum tax free.
A stakeholder pension scheme is very similar to a personal pension, with some minimum standards laid down by the government:
- The charging structure is capped to 1.5% a year for the first 10 years, and then a maximum of 1% a year thereafter
- There are no penalties for altering/stopping contributions or transferring benefits to a different scheme.
- Providers may only refuse to accept contributions if they are below £20.
Typically split into two different arrangements – direct contribution (as explained above) and direct benefit. The benefits provided by direct benefit on retirement are based on the member’s length of service and earnings. The employee contribution is deducted from their salary automatically, and will be listed on their payslip.
The Government is taking steps to encourage greater saving from an earlier age, by introducing auto-enrolment for all eligible people (which I have already covered here)
There are some schemes that are not covered in the categories above, the key ones being SIPPS or Self-Invested Personal Pension Schemes. These are specifically designed to give the individual a greater choice and freedom to decide what types of assets are invested in (including shares and property), and when those assets are bought and sold. There are several different types depending on the specifics of the scheme. This type of scheme should only be used by experienced investors, since there is a much greater risk associated with it.