What is a Pension?
by Suraj V. Digital Marketing (sr. SEO Expert)Did you know that only 28% of people feel they are on track
to meet their retirement needs?
A pension
can be the solution but complicated rules often put us off even getting
started, meaning we miss out on the massive benefits! Let’s face it: pensions
aren’t the most thrilling of subjects, but it’s important to engage with them
to ensure you don’t miss out on the benefits they offer.
When it comes to being financially stable later in life,
pensions are essential. So, let’s delve into what they actually are.
A savings plan to provide an income in retirement
Put simply, a pension is a long-term savings plan designed
to financially prepare you for when you stop working.
During your working life, you save into a pension to build
up a pot of cash for when you retire. The best part though, is that in addition
to the amount you save, you benefit from a top-up from the government of at
least 25% every time you contribute
from your net income. So, if you pay £80 into your pension, you’ll get at least
an additional £20 from the government – no strings attached! If your employer
takes care of your pension you’ll normally pay in straight from gross wages
which means you are saving that amount in income tax.
Read more about the tax benefits here.
Your savings are invested
in the stock
and
bond markets and, when you retire, you take money from the pot. You can
typically draw
your pension benefits from age 55 onwards.
State Pension
There are many different pension types. The best-known is
the State Pension,
provided by the government.
Depending on your retirement age you will have to contribute
to the National
Insurance system for as many as 35 years to be eligible for the full State
Pension. Even then, you’ll only get roughly £8,750 per year from it (based on
the current amount). Will that really be enough to live on?
It’s unlikely that the State Pension will provide enough
income for you to maintain your standard of living when you retire and there
are also concerns around the funding of the State Pension. So, the government
is keen for you to consider private pensions. Let’s talk about those.
Private Pensions
There are two main types of private pensions:
Defined Benefit
(DB) schemes
Defined
Contribution (DC) schemes
Defined Benefit pensions promise you a certain income in
retirement based on your years of service with your employer. However, they
suffer from a similar issue as the State Pension in that they are often underfunded,
meaning the employers providing them sometimes can’t live up to the promises
they made.
For this reason, Defined Contribution schemes have gained in
importance in recent years and are now the most popular type of pension. Under
a Defined Contribution scheme, the value of your pension at retirement depends
on the amount you’ve paid in (including the government contribution) and the
performance of your investments.
Defined Contribution schemes are either:
Workplace
pensions, arranged by an employer
Personal pensions,
taken out individually
Personal pensions come in various forms and are generally
more flexible; however you have to do some legwork in getting them set up
yourself. Once done, though, you can contribute to as many as you want
regardless of whether you have a workplace pension.
A Pension Designed for the Self-Employed
Since 2012 employers are required to automatically enrol
employees into a pension scheme as well as contribute to it, which means that
more employed people are now benefitting from a pension.
Unfortunately, nothing similar exists for self-employed
people. While the government has been trying to come up with ideas, the
diversity and flexible working patterns of the self-employed has made it
difficult to find a workable solution.
For these reasons, Raindrop is offering a personal pension
scheme that truly suits the needs of the self-employed.
We believe the key is maintaining the basic building blocks
of a traditional pension – such as long-term investments – while offering a
fully digital, hassle-free and all-round flexible solution. Staying on top of
your retirement savings should not be a burden.
P.S. For a more succinct overview of the key things relevant
for pensions, you can also check out our Key
Pension Facts guide.
How much could my pension be worth? If you have the same
question, make sure to try out our Pension
Calculator.
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Created on Sep 9th 2021 05:03. Viewed 333 times.