About pensions

If you’re dreaming of a financially secure retirement, pensions are a great way of making those dreams come true.

You could be entitled to a pension from various sources:

• The State Pension - paid when you reach retirement age, so long as you’ve paid enough National Insurance contributions
• A company pension - operated by your employer
• A personal pension or stakeholder pension - where you save for your own retirement – though your employer can also contribute

If you’re not a member of a company pension scheme, or if you’re self-employed, you can save for your own retirement using a stakeholder pension or a personal pension.

If you still haven’t made up your mind about starting a pension, here are a few thoughts to consider:

The State Pension won’t be enough

In 2009/10 the basic State Pension for a single person is just £95.25 a week. For a married couple it’s £152.30 a week. How does that compare with what you earn, and what you spend, today? The amount you receive could be less if you haven’t paid sufficient National Insurance Contributions.

We’re living longer

Living longer in retirement means that inflation has more time to erode the purchasing power of your pension. Having a good sized pension fund can help you overcome this. Remember, you could spend 20 years or more relying on your pension.

Pensions are tax efficient

No other type of savings plan can equal pensions for tax efficiency.

• Tax relief on contributions - the amount of tax relief depends on how much you earn. If you’re a higher rate taxpayer saving £2000 a year it may only ‘cost’ you £1200
• Tax efficient growth - the fund that your contributions are invested in doesn’t pay any UK income and capital gains taxes
• Tax free cash - you can take up to 25% of your pension fund tax free when you retire

If you think you already have your retirement plans covered, it could be wise to think again. A pension plan or some other type of investment puts you in control of your financial future. Other, less certain plans may not have the outcome you hope for.

“I'll downsize and use my home equity for my pension”

Relying on the equity in your home to fund your retirement income could be fraught with difficulties. For a start, you can’t accurately predict how much your home will be worth nor can you predict the cost of the type of home you plan to downsize to.

You may find that you have to compromise your pension or your home move, or both.

“I'm due an inheritance, that will be my pension”

Placing too much reliance on an inheritance could be unwise since:

• You don’t know exactly when you’ll receive the money
• The person leaving the money may change their will
• They may decide to spend their money, or it could be used to pay for long term care

An inheritance should always be considered to be a bonus rather than a guarantee.

When you save with a personal plan, you’ll enjoy a range of benefits:

• Tax relief - on your contributions, the amount of tax relief depends on how much you earn
• A lifetime income – your pension fund can be used to buy an annuity, which provides you with a monthly or annual income. Your annuity can increase in payment and carry on to your spouse or civil partner after you die
• Locked in savings – because of their generous tax advantages, you can’t normally get access to your pension fund until you’re 55. So you’ll never be able to fritter it away
• Have more than one if you want – even if you’re already a member of a company scheme, you can still top up your savings with your own pension plan
• Complete portability – when you change jobs, you can take your pension with you
• Investment choice – self invested personal pensions in particular offer you the widest range of investment opportunities
• Decide how you want your benefits – you can take it all as income or part tax free cash and the remainder as income