Talk Money Talk Pensions Week: Understanding pensions
Talk Money Talk Pensions Week: Understanding pensions
Getting older is something no one wants to think about until it happens. However, being prepared for the day you retire is a huge part of life and something that should be given serious consideration.
According to research by the Money and Pensions service, 22 million working-age adults don’t feel that they understand enough about pensions to make decisions about saving for retirement.
As such, we thought we’d join in Talk Money Talk Pensions Week and take some time to lay out pension basics. In a bid to help your financial wellbeing, we’ve created this guide to show how pensions work, different types available and why it’s important to have one.
What is a pension?
Put simply, a pension is a savings plan that’s designed to help prepare you for when you stop working and, hopefully, put your feet up.
The idea of a pension isn’t new, as a lot of people will likely have been putting money aside for retirement long before schemes existed. Saving a small amount throughout the course of your working life can make all the difference when it comes to life after work.
Most employers will opt you in to a pension scheme for the duration of your working career. The money is usually taken from your wages and put into a pot until later in life – however, it’s also possible to set one up yourself.
This will then become extra income to go alongside your state pension as a way to help you get by. In some cases, it’s even tax-free.
Types of pensions
There isn’t just one type of pension, and what kind you get is generally based on your situation.
The two main types of pensions are private and state. However, this can then be split even further:
Defined benefit schemes (private)
Also known as a workplace pension, defined benefit schemes dictate that once you reach the retirement age specified in the paperwork, you’ll get an exact amount. This is usually worked out from how much you earn and how long you have been in your job.
Payments to this pension are usually arranged by your employer. They are then also responsible for making sure there’s enough money to pay out when the time comes. In some cases, you can also make payments towards this scheme to help build it up.
Defined contribution schemes (private)
This type of pension generally works the same as a defined benefit pension. The main difference is that instead of a specific amount being paid out, how much you get depends on how much is paid in.
In most cases, your employer will opt you into this type of scheme, deducting the payments from your wages before they even reach you. If you set it up yourself, then you will be responsible for the payments.
Whilst you are working, the provider will usually invest your money into stocks and shares with the aim of growing the fund for when you eventually access it. You’ll be given options for things you can invest it and you can choose these when you set it up.
You can access the money at any point after you’ve turned 55. There are a number of ways you can take it, including:
- The whole lot in one go – however, you’ll only get 25% of the amount tax-free and this could push you into a higher tax bracket
- Smaller amounts as and when it’s necessary – you’ll get a quarter of each amount tax-free in this case
- Taking just a quarter of it tax-free and using the rest either as a normal income or a retirement income
All of these options will be presented to you when you choose to claim access to your pension pot. If you’re unsure about what option is best for you, it’s best to seek advice from a financial adviser.
This is the pension you get from the government, and you only get access to this when you reach state pension age. This is generally capped at 65, but how old you need to be has changed over the course of the year and is currently under review (2019) to be increased to 68.
You don’t get access to this automatically, however. In order to get the state pension, you’ll have to claim it. A letter will usually be sent to you within two months of you reaching state pension age, which will tell you what to do and how to claim your money.
If you don’t get this letter, you can still claim your pension online, on the phone or downloading the form and sending it to your local pension centre.
Do I still get state pension if I continue working?
Just because you’ve reached retirement age, doesn’t mean you have to retire. If you feel able or you simply just want to, you can do so.
You can still claim your state pension in these instances, but you also have the option to defer it. This can mean that the amount you get could increase, leaving you better off in the long run.
Why is a pension important?
Now, the answer to this may seem simple – to have money when you retire. But there are millions of people out there who aren’t saving enough to get by later in life.
The state pension in the UK has been criticized for not being enough for people to live on – especially compared to other countries. As such it’s important not to rely on it as your only source of income when you retire.
Pensions are a big part of your later life, and the more you save into one the better off you’ll be when you stop working. We all want to grow old gracefully, so it’s best to be smart and make sure your pension is sorted sooner rather than later.
If you’re stressed about your finances, contact us today on 0808 2085 195. As Scotland’s debt specialists, we can offer free and confidential advice to help you work through your debts and find a solution that works for you.
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