Pension Basics

Why have a pension?

You may ask why you need to bother with a pension. The obvious answer is that it will provide the money you need to live on when your income from work stops.

People are living longer and healthier lives, so it is even more important to think about how and when to save for retirement. Retirement can last for 20 or 30 years, maybe even longer. Depending on how luxurious you want your retirement to be, you will need to set aside cash now to fund everything from day to day living expenses through to the cost of that round-the-world cruise or holiday of a lifetime. And because the State Pension is only likely to provide a very low level of income – really just a safety net against poverty - it is essential to consider other options to significantly top-up your income in retirement.

To provide additional encouragement, the Government gives us a tax break on the money we save for retirement. Providing your pension scheme fulfils the criteria they have set down, then the money that goes into it comes out of your pre-tax earnings. In other words, they give you back the income tax you have paid on the contributions you make to your pension – 22% if you are a basic rate taxpayer or 40% if you pay higher rate tax.

The Golden Rules of saving for retirement

The sooner the better - The sooner you start saving, the better off you will be when you retire because your pension savings need a chance to grow over time. Even small amounts can grow to huge sums if saved for long enough, through 'the magic of compound interest'. Even the Government recognised this when they made it possible for parents and grandparents to start a pension for their children and get all the tax breaks.

Save as much as you can, as soon as you can - In an ideal world, when working out how much you should save, you should think about the lifestyle you want when you retire, when you want to retire and consider any other sources of income you will have. You can then work backwards to a monthly amount you will need to put away. But most people find that the resulting amount is much more than they can afford right now. So for most people the best thing to do is simply put away as much as you can as soon as you can.

Save in other ways if access is important - Other saving and investment routes are important if you are likely to need access to your savings before you retire. While it is a good thing to have some of your retirement savings locked away so they cannot be spent, you may want to invest some of the money outside your main pension scheme. As well as savings products like ISAs, there are also more lateral ideas such as shares, property, art, wine, etc.

Monitor your retirement savings regularly - Regular reviews are key. Once you have set up for retirement plan, keep an eye on how your investments are growing (or not) and how well they suit your circumstances and plans. As time goes on chances are you will be able to save more each month and get the opportunity to add further top ups through a bonus from work, an inheritance or something similar. This way you will be more likely to enjoy the income in retirement you aspire to.