About pensions

Your own pension plan is a great way of helping your dreams of a financially secure retirement come true.

When you retire you could receive a pension from various sources:

• The State Pension - paid from state retirement age, provided you’ve paid enough National Insurance contributions
• A company pension - provided by your employer
• A personal pension or stakeholder pension - that helps you save for your own retirement – though your employer can also contribute

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

Still not made up your mind about starting a pension? Here are some thoughts to consider:

The basic State Pension for a single person in 2009/10 is only £95.25 a week or £152.30 a week for a married couple. How does that stack up with what you earn today, and what you spend? If you haven’t paid enough National Insurance Contributions, the amount you receive could be less.

A longer retirement gives inflation longer to gradually erode the purchasing power of your pension. A good sized pension fund can go a long way towards helping you overcome this. It’s possible that you could spend more than 25 years relying on your pension.

Pensions are more tax efficient than any other type of savings plan.

• Tax relief on your contributions - at the highest rate of tax you pay. If you’re a higher rate taxpayer a £2000 annual pension contribution 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

Don’t run the risk of fooling yourself into believing you have your retirement income covered by some other arrangement. A pension or some other investment plan puts you in the driving seat when it comes to your financial future. Other plans might not have the outcome you hope for.

Great in theory, but not so straightforward in practice. How can you be sure you’ll be able to sell your house at the same time you decide to retire? And how confident are you that you’ll be selling at a time when you’ll get the best price. What’s more, you don’t really know the cost of home you plan to downsize to.

All things considered, you can’t accurately predict the future value of your home equity. You might find that you have to compromise your pension or your home move, or both.

Relying solely on an inheritance could be unwise since:

• You can’t predict accurately when you’ll receive the money
• The person leaving the money might change their mind and remove you from their will
• They may spend their money, or use it to pay for long term care. What’s left could be a lot less than you expect

If you’re likely to receive an inheritance, think of it as a bonus, not a guarantee.

Pension plans enjoy a range of benefits:

• Tax relief - on the payments you make to your plan, how much tax relief you get depends on how much you earn
• A lifetime income – you can use your pension fund to buy an annuity, providing you with a monthly or annual income. Your annuity can increase in payment and carry on to your spouse or civil partner on your death
• Earmarked for your retirement – because of the significant tax advantages, you can't normally get access to your pension fund until you're 55. You can't dip into it when you want so it will be there when you retire
• You can have more than one – you can be a member of a company scheme and still top up your savings with your own plan
• It’s completely portable – take your pension with you when you change jobs
• Investment flexibility – depending on the type of pension you choose, you can access a wide range of investment opportunities
• Flexible benefits – you can take it all as income or take some tax free cash and the rest as income