Pensions can be fairly complicated, and this can put people off retirement planning – maybe until it is too late. Fortunately, it is possible to summarise the different types, how they work and how they might feature in your own financial plan. Below, our team at Vesta Wealth offers an overview of different pension types. We hope you find value in this and invite you to get in touch if you’d like to discuss your own pension(s) and retirement plan with a financial planner.
The state pension
Whilst it is unlikely to cover all of your expenses in retirement, the state pension provides an income from the government. This is funded out of general UK taxation, is based on your national insurance record, and rises with wages/inflation to keep up with the rising cost of living. In 2021-22, the full new state pension is worth £9,110.40 per year and requires at least 35 qualifying years of national insurance contributions (NICs) to attain.
Any less than 10 years of qualifying NICs, however, and you do not receive anything. Given that the income rises each year (under the current triple lock system) and keeps going indefinitely until you die, it is worth obtaining a forecast to see what you are likely to receive. Bear in mind that you can only access your state pension once you reach your state pension age, which is set at 66 as of April 2021. Each person is entitled to their own state pension so a couple could maximise their future household retirement income by building up their own NIC records. You can obtain a state pension forecast here: https://www.gov.uk/check-state-pension
Final salary pensions
In the past it was common for employers to offer a final salary (or defined benefit) pension to their staff. This type of scheme pays out a guaranteed, lifetime income when you retire – based on factors such as your years of service and average salary. In more recent years, final salary pensions have become much more rare due to company affordability (people are living longer) and also due to higher work mobility (i.e. people move jobs more than they used to). However, many public sector employers such as the Government still offer these generous pensions.
Generally, final salary pensions are seen as very valuable and are often called gold plated pensions due to their rarity and value. They do not involve a pension pot, as such, but rather the income is paid from the scheme set up by your former employer. This can provide a high degree of financial stability in retirement but can be restrictive if you want to eventually pass down your pension as an inheritance. The income is often linked to inflation, and sometimes schemes offer benefits (albeit reduced) to your spouse if you die first.
Workplace pension pots
In recent years, most private sector employers put their new staff automatically into a workplace pension scheme, via auto enrolment. You are then required to put in a portion of your salary into this scheme, with your employer putting in a minimum of 3%. The money will typically be invested in a range of funds, such as bonds and/or company shares, to give it a better chance of growing compared to cash gathering interest in a bank account.
The idea is that you can eventually access the money to generate a retirement income. You can do this from the age of 55 (expected rise to 57 from 2028). Your options include using some/all of the capital to buy an annuity – i.e. a financial product providing a regular income – or taking drawdown, which involves gradually taking some of the funds out to support your lifestyle whilst keeping the rest invested. Some people buy an annuity to cover their essential expenses and use drawdown to fund more discretionary spending, such as a yearly holiday.
Personal pensions
The pension types covered so far are provided by either the government or by your employer. However, there is also the option to open your own pension scheme (a private or personal pension) and take it with you throughout a career. You can open an account such as a Self-Invested Personal Pension (SIPP); the advantage of this approach is that you can often be much more flexible in your choice of investments for your pension. A workplace pension, on the other hand, may be restrictive in the funds they offer to employees. Another benefit is that a personal pension can be a good place to consolidate multiple pension pots scattered around from a successful working life in different jobs. With a personal pension, however, it is especially important to consider financial advice to ensure that your portfolio is properly diversified and that you are not paying excessively high fees on your funds.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.