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Pensions Demystified

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Pensions are a daunting subject because let’s face it; nobody likes the idea of growing old. Planning how we will survive after retirement is hugely important, especially when taking into consideration how little income the basic state pension will provide. Pensions can be complex to understand, that’s why I have written this simple guide to talk you through the basics and demystify the topic.

What is a state pension?
State Pensions are split into two parts, the basic state pension, and the additional state pension. The majority of people are entitled to receive a basic state pension when they are of the state pension age; this depends on your birth date but is most likely to be between the ages of sixty five and sixty eight for any who is yet to retire.

The amount of income you will receive will depend on how much NI (National Insurance) you have contributed during your career. People who have taken lengthy career breaks may not be entitled to the full pension.

The Additional state pension is a pension paid on top of your standard state pension. Up until April 2002 this was known as the State Earnings Related Pension Scheme (SERPS). This is only paid to people who have contributed Employees Class 1 National Insurance Contributions.

What is a personal pension and do I need one?
Personal pensions provide you with a regular income whenever you retire from work and are one of the most common ways to prepare for retirement. Personal pensions require you to contribute money on a monthly basis to a pension provider that will invest your contributions on your behalf. Pension funds are usually managed by financial organizations such as banks, insurance companies and wealth management companies.

Whether or not you will need a personal pension depends on how much money you can afford to set aside for retirement and how much you can expect to receive from other forms of income. If the company you work for provides a company pension scheme, it might be worth increasing your monthly contributions to this fund. If not, personal pension plans offer generous tax breaks and are a great tool for retirement saving.

How do I choose the right personal pension?
With so many different pension providers to choose from, it’s definitely worth shopping around to find the deal that provides the best return on investment. There are numerous factors to take into consideration prior to taking out a personal pension plan, such as how your contributions will be invested, the provider’s service costs and how much you can afford to save. If you are unsure of which pension to choose, it might be worth considering a chartered financial planner they will be able to talk you through the various advantages and disadvantages of each option.

If you’re worried about being unable to make regular payments then a stakeholder pension is a good choice. Stakeholder pensions allow you to stop and start making contributions whenever you like. Self Invested Personal Pensions (SIPPS) are another option; these provide a greater choice of investment options and are ideal for seasoned investors.

What is an annuity?
This is a contract taken out with insurance companies to provide you with a guaranteed form of income for the rest of your life. Annuities are usually purchased using money from a pension fund; these are a relatively low risk investment option. Many people purchase an annuity upon retirement to replace the income they received when they worked. Depending on your health conditions, you may be entitled to a higher amount of income.

What risks are involved with having a pension plan?
When contributing to a pension plan, all of your contributions are invested into investment funds. Investment funds are usually invested in things such as, bonds, the stock market, foreign exchange or real estate. The way in which your money is invested will depend on which investment funds you choose. As with any investment, the value of your fund can increase or decrease may even be worth less than the amount you have contributed.

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