Why it pays to have a pension

Why it pays to have a pension

Perhaps retiring is something that seems many years away, so you think you don’t need to worry about pensions yet, or the whole concept of a pension pot seems complicated and therefore slightly overwhelming.

However, it is well worth understanding the number of advantages that are included by putting money away for retirement – it definitely pays to have a pension. Here at Guarantor Loan Comparison, we explore the main reasons why it is important to consider having a retirement fund.

State pensions explained

One of the biggest errors you can make is thinking that you don’t need to save as you intend to rely completely on receiving a state pension once you reach retirement. According to the Money Advice Service, it is estimated that up to one-third of all adults in the country aren’t saving a penny for retiring.

Changes made to the state pension in 2016 means that the amount that you will receive if you retire has altered. Previously, to receive a full state pension you would need to have made 30 years’ worth of National Insurance contributions. Now you will need to have made at least 35 years. Furthermore, to even receive a basic state pension, you will need at least 10 years worth of National Insurance contributions.

State pension amounts

In addition, the amount you can receive for a full state pension is considerably lower than most people say they expect to have or hope to live on for retirement. In research conducted by consumer group Which? it is thought that retired couples needed at least £18,000 each year in order to be able to afford household essentials such as transport, utilities and food.

Other figures provided by the pension sector have stated that the average person in the UK needed between £23,000 and £27,000 each year in order to maintain their previous lifestyle and therefore live comfortably in their later years. Unfortunately, the maximum you can receive on a state pension in the UK (providing that you meet the eligibility criteria) is just £8,546.20 a year. As a result, this is one of the main reasons as to why it pays to have a pension of your own.

The advantages of saving for a pension

A notable benefit of paying into a pension is that you will be able to increase your savings at a much higher rate than otherwise possible, as it works essentially as a long-term savings plan and you are able to get tax relief too. The money you put into a pension pot is then invested meaning that over the course of your working life they will grow and therefore provide you with income once you retire.

Pension investment schemes in the UK

There are a number of different investment schemes for pensions available in the UK:

Personal, stakeholder and defined contribution schemes

These schemes typically offer a range of funs in which your pension provider will typically ask you where you want your money to be invested. If you do not choose, a ‘default’ fund is created on your behalf.

Defined benefit schemes

This is usually as part of a workplace benefit scheme, meaning that your employer will usually make the investment decisions.

Self-invest personal pension (SIPP)

If you have a large pension pot and are comfortable with managing your investments, SIPPs may be perfect for you.  A SIPP essentially works as a wrapper around any pension investments you have made, allowing to get tax benefits (ie.e being allowed to take a tax-free lump sump equating to 20 percent of your pension pot fund after you have reached the age of 55), Companies like interestme help you to choose to invest in a range of assets, including government securities and unit trusts, with an authorised investment manager helping to make the decisions on your behalf.

With SIPP, it is possible to contribute up to the equivalent of 100% of your wages up to £40,000 in total.  The total amount you are able to invest in pensions savings is £1,030,000 (otherwise known as the ‘lifetime allowance’ and this is calculated amongst all pension schemes in the UK except the state-funded pension. However, the money that is invested in SIPP means that it can grow with income tax and capital gains tax applied to it.

As demonstrated in this article, there are a number of reasons as to why investing in a pension pot is important. It means you can live a much more comfortable life in your later years, and provide you with peace of mind.