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Could you live on £4,000 a year? If you can, then don't bother to save for retirement -
this is roughly what you currently get when you retire on the basic state pension. Few of
us can afford to live on such a low income and in the future the state pension is set
to wither on the vine. The only way to ensure a financially secure old age is to save
for it ourselves.
Do I need a pension?
As part of a job offer an employer may give you the chance to join the company pension
scheme and, as few of us could afford to live on the current Government state pension
of £79.60 per week, saving to ensure a financially secure old age is imperative.
How does a pension work?
A pension is simply a tax free method of saving for retirement. Money is paid in free of
tax, so a basic rate tax payer gets £22 topped up to £100 by tax relief while higher
rate tax payer gets £40 added to every £60 they pay into a pension. The money then
grows free of tax. At retirement most of the money built up is then used to buy an income.
If I take the job, should I join the pension scheme?
If you work for an organisation that offers a pension scheme to its workers then you
are almost certainly better off joining it rather than going it alone. In addition
to the money you pay in, your employer will usually pay money in on top. There will
probably be other extra benefits such as free life insurance cover.
What type of scheme will I be offered?
More and more employers are opting out of offering employees final salary schemes,
which are more expensive to the employer, but give a guaranteed pension level based
on a percentage of your final salary. You are more likely to be offered a money
purchase scheme, which is an individual fund (rather than into the collective final
salary pension), and your find grows within the company's overall scheme. When you retire
your pension will based on the value of that fund.
What if my potential employer doesn't offer one?
If a company with five or more employees then it must provide access to a pension scheme.
At the very least it will have to act as a gatekeeper to one of the new low-cost and
flexible stakeholder pension schemes. It will have to tell you about the scheme and
arrange for money to be deducted from your pay if you decide to join it.
The Guardian's website has a handy pension calculator, which helps you work out how
much money you will need in retirement and the level of contributions needed to
achieve your aim.
I am self employed. What can I do?
You can take out an individual stakeholder pension with its one per cent a year
limit on charges. If you already have a personal pension it may be worth seeing if
you can swap it for a cheaper stakeholder scheme. But watch for any charges if
you do so.
How much can I pay in?
You can pay up to 15 per cent of your yearly earnings into a company pension scheme.
In addition to this, if you earn less than £30k per year, you can pay £3,600 a
year into a stakeholder pension at the same time. You can do this for the next
five years. Personal pension payments depend on age, starting at 17.5 per cent of
earnings, rising to 40 per cent for people aged between 61 and 74 years old.
What happens to my pension if I keep moving jobs?
What happens to your pension depends on the sort of pension you have, and how long
you have held it. In general, if you have had an occupational pension for less than
two years, you will be refunded the contributions. If you have lost track of old
pensions, don't worry - they don't just disappear, you can trace them through The
Pension Schemes Registry, run by the Occupational Pensions Regulatory Body, which
can be contacted on 0191 225 6316.
When can I get at my money?
You cannot get at your money until you retire. In normal circumstances the
earliest you can do this is age 50. At that point you have to use most of your
pension fund to buy an income, although you can take 25 per cent as a tax-free
lump sum.
How do I buy an income?
Most people take their income from an annuity which they buy using their accumulated
pension fund. This will pay an income for life, no matter how long you live. Annuities
aren't very good value at the moment and you can take income direct from the fund.
This is called 'income draw down' and is really only for people who can afford to
take a risk with their retirement money. Everyone has to take an annuity by 75
years of age.
What are the alternatives to a pension?
Be warned, there is increasing evidence that pensions will not be as good an
investment for your retirement as they used to be. Today's 25-year-olds, on an
average salary of £23.5k, will have to save a staggering half a million pounds
to retire comfortably at 65, according to investment company Bestinvest.
Equally alarming is the news for people over 40 who haven't been paying into a
pension scheme - they will need to contribute nearly a third of their gross salaries
to retire at 65.
Alternatives include Individual Savings Accounts (ISAs). These offer good tax
breaks and do not lock up your money in the same way pensions do. You can pay into
up to £7k into an ISA after tax. You can take the money when you want and it is tax
free. If you take an ISA instead of a pension you will have to be very disciplined
and ensure you don't touch the money until you retire. Property is also seen as a
good invest, as ain a buoyant housing market, property
prices tend to rise faster that interest rates. Buy one or more properties could make
you more money than more traditional methods of investment.
Where can I find out more information?
The Department for Work and Pensions (DWP) has plenty of information on pensions and
retirement, at
http://www.dwp.gov.uk/lifeevent/penret/.
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