What is a pension and why you must absolutely have one

March 3, 2015

Here at GreenSky Wealth we’re dedicating March to pensions. It might not be the most glamorous thing in the world, but saving for retirement is really important. And with all the changes to pensions that are afoot, we thought it was a good time to try and demystify pensions by looking at as many different aspects as we can.

Some of what we’ll cover will be back to basics to help steer those of you who need help getting started. We’ll then progress into murkier waters and discuss things like why moving money out of a final salary pension might work in your favour.

All along, we’ll be encouraging you to ask questions, comment and discuss with us so we can help you feel confident about your own situation. We’ll make it all as palatable as possible using plain English. You can connect with us on Facebook and Twitter and join our discussions there, or follow the blog. You can also sign up to our enewsletter via our website to receive a handy digest of that week’s activities. So there’s really no excuse not to come along for the ride!

It’s easy to assume, especially for people like us who are involved on a daily basis, that everyone knows what a pension is, but just in case, to prepare everyone for the coming month…

What is a pension?

At its most basic level, a pension is a way of saving for retirement. There are various types of pensions including the state pension, company pensions or personal pensions (we’ll be going into all of these in a bit more detail over the coming weeks).

Why do I need a pension?

You might think that just putting a bit of money aside each month will cover you for your retirement. By that point, after all, you’ll probably have been working for a lot of years, maybe the kids have left home, and you’ll hopefully have paid off your mortgage so you won’t need so much money, right?

But you’re going to have to replace your monthly wage with something. And because, on average, we’re all living longer, you might have quite a few years of living left to do. So rather than just stuffing some money under your mattress each month, or putting it into a savings account, a pension is a good idea.

Benefits of having a pension

  • There are significant tax advantages to investing in a pension
  • Depending on how you choose to invest your pension, you might get a better return than from a regular savings account
  • Your pension can provide you a guaranteed income in your retirement, no matter how long you live for, so you’ll never run out of money
  • Your money is kept safe – you won’t be tempted to withdraw it early and spend it on something else, potentially leaving you bereft in your retirement!

When should I start thinking starting a pension?

Seeing money going out of your account or wages and into a pension each month can seem hard to justify, especially if retirement is years away. There are probably lots of things you’d rather be spending it on right now. But the earlier you start saving into a pension, the better chance you’ll have of enjoying a comfortable retirement. No matter how old you are, if you don’t have a pension yet, start saving now!

What happens to my money in a pension?

From the moment you set up a company or personal pension, the money that you pay in gets invested in a variety of ways. You can choose how much influence you have over where the investments are made, but the idea is that by investing your money, it will grow over the years, giving you more money for your retirement.

When you reach retirement age, there are a number of options available to you as to what to do with your money. In the past, the options have been a little limited, but forthcoming changes are giving people a lot more choice over what to do with their pensions.

Most people currently choose one of two options:

1)      Buy an annuity, which pays you a regular income for the rest of your life

2)      Take an income directly from your pension plan (income drawdown).

That’s oversimplifying things, but we’ll go into more detail about your options throughout March.

So what should I do now?

If you don’t have a pension, pay attention to what we have to say over the next month and plan to have measures in place before the end of April this year. Take some action now to see the benefit in the long run.

If you do have a pension, pay attention anyway. With all the changes happening, you might find that you need to rethink your plans. It’s also good to review your pension on a regular basis to make sure you’re getting best value for money. The first step to making your pension really work for you is to understand it – that’s what we’re here for!

 

The value of an investment and the income from it could go down as well as up.

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

GreenSky Wealth Limited is authorised and regulated by the Financial Conduct Authority. FCA No. 629624. Registered Office as above. Registered in England and Wales, Company No. 07103441.