Put your pension pot to work
By Jeff Salway
Pensions are for old people aren't they? If only it was that simple. Forget cruises and imagine counting every penny every day and wondering if you will have enough to buy food and pay your bills. This is the reality if you fail to plan ahead.
These days it's easy to think more about the here and now and less about the later on. But saving even small amounts now can make a big difference to the way you can afford to live when you stop work.
It may not be the most exciting thing to think about - or spend money on - but don't underestimate how little, if anything, you will get from the government when you retire. So unless you set up a pension now, the chances are you will live a pretty restricted life at a time when you should be free of worries.
Why do I need a pension?
Put simply, a pension is a pot of money you save during your working years to provide an income when you stop working. Although the details of how pensions work can seem dull or confusing, it's essential to spend some time understanding the basics and this site will help you get to grips with your own pension planning.
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.
So why do you need to bother with a pension? Well the obvious answer is that it will support you when your work income 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 living costs to holiday-of-a-lifetime costs. But because the State Pension is only likely to cover the cost of a few lottery tickets, it is essential to consider other options to provide a retirement income.
There are various types of pension plan available. Check with your employer first to find out whether you have access to an occupational scheme. If you do, then this is likely to be the best option as the costs are usually covered by employers who may also make some or all of the contributions or match the ones that you make. Alternatively, personal pensions can also be set up and may be taken from one job to another. The government also established stakeholder pensions in 2001, which may appeal because of their low charges.
What is a stakeholder pension?
Stakeholder pensions are designed to encourage pension savings. They are secure, flexible, offer value for money and provide the opportunity for many more people to save for retirement in a way they can afford.
Although they could be a good option for people who currently earn more than around £10,000 a year, stakeholder schemes are available to almost everybody, including people in employment, fixed contract workers, the self-employed and people who are not actually working but can afford to make contributions. There is no limit to the amount that can be invested in a stakeholder pension scheme but tax relief can only be obtained on contributions up to the level of a person's salary (subject to an annual limit of £215,000 for the tax year 2006/07). It is possible to contribute up to £3,600 per year (including tax relief) into a stakeholder pension scheme even if a person is not earning.
The low charges also add to their appeal - if you took out a stakeholder pension before 6 April 2005, it will have an annual charge of 1% for as long as you remain in the scheme. If you move to another stakeholder pension scheme on or after 6 April 2005, the new charge cap of 1.5% will apply for the first ten years of membership of that new scheme.
As with all pensions, you should compare stakeholder pensions with the other pension options available so you can make an informed decision about which option is best for you. For instance, if your employer runs an occupational scheme, it will normally be a better deal for you than any pension you take out yourself.
It's never too late
Stop making excuses - it's never too late to start a pension. In fact the sooner you start saving, the better off you will be when you need the cash because your pension savings need a chance to grow over time. Even small amounts grow to huge sums if saved for long enough through 'the magic of compound interest'.
It may be a long way off but think about the lifestyle you want when you retire and calculate how much you can afford to contribute towards your pension fund each month. You will also need to take into account when you want to retire and whether you have income from other sources. Few of us can afford to save as much as we ideally should, so just put away as much as you can as soon as you can.
Once your pension is up and running, make sure you check it regularly to ensure your investments are on track for a happy ending.
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