Private Pensions
Why might I need a private pension?
The state pension on its own is not very generous, so most people who want to get more money in retirement to live on get a private pension. A private pension is a way of saving more money into a pot, so that when you are retired you can have more money paid into a bank account that you can live on.
Where can I get a private pension?
Private pensions are available from a number of places. Most life insurance companies offer these and you can also go to a number of financial advisers who in turn advise you of those available in the market.
How old should I be when I start saving for a private pension?
In theory, it's never too early, because if you save while you're younger, you benefit from the money being invested for longer, and that actually means that you should get a much, much better pension when you retire. To give a simple example, if you start saving into your pension in your 20s, you can probably afford to save about half the amount compared to someone in their 30s to get the same pension when you retire.
How old do I have to be before I can start receiving my private pension?
At the moment, the earliest you can take a personal pension is age 50. And that's going to change, it's going to rise to age 55 from 2010. You have to take the pension by age 75.
What is the additional state pension?
The basic state pension is quite low, so there is a possibility, if you want to, to top that up. This can happen automatically by taking some of the national insurance contributions that everyone pays, and paying some of that into the state scheme; so that it boosts your pension and retirement. Alternatively, you could actually choose to have those extra contributions paid into a separate, private pension if you want more flexibility and control over what happens.
What is the State Earnings Related Pension Scheme SERPS?
The State Earnings Related Pension Scheme, also known as SERPS, is a way to top-up your basic state pension. This can happen more or less automatically, because the government will take a little bit of the National Insurance that you pay when you're working and put it into the State Scheme to actually top it up. This came into place in 1978 and stopped in 2002, being replaced by the State Second Pension, a very similar scheme.
What is the State Second Pension (S2P)?
The State Second Pension, also known as S2P, is a way of topping off your basic state pension. Now it can happen more or less automatically, what happens is the government takes a little bit of the insurance that you pay while you're working and uses it to top off the basic state pension. So when you retire, you should get an additional amount on top of the basic state pension.
What is a graduated pension?
The graduated pension was only available if you were working between 1961 to 1975. It offered a way to increase your basic state pension and retirements. The government took a little of your national insurance contributions while you were working and they put them in the state pot. So basically, increased your state pension but not by very much.
What is a non-contributory pension?
A non-contributory pension is one where you don't have to pay in anything directly yourself. It's something for nothing, obviously a good deal. This really tends to be available by employer pension schemes, so if you have a job and your employer has a pension scheme, it may be that they put money into the scheme on your behalf, and you don't have to put in a penny yourself; a good deal.
What factors should I look for when shopping around for a pension?
The key factors, when looking for a pension, are really to ensure you're getting good value for money. That means two things. One, you want low charges. There's no point in paying ridiculous charges because that's going to eat into your pension pot. The second is performance. Most pensions require you to invest some money, and hopefully make that grow between when you invest and retirement, so that you have a nice pot to draw upon in retirement. Again, good performance is essential because, if funds perform badly, you'll get hit by stock market crashes. You obviously can wipe out your pension pot.
Can I save in multiple pension schemes?
You can save into multiple pension schemes you just need to bear in mind that when you retire the sum of all those individual schemes can't exceed what's called a lifetime allowance. This is quite high, currently it's 1.6 million pounds, it increases each year but if you are putting big contributions into pensions, just bear that in mind.
What are the risks of a private pension scheme?
The biggest risks when investing into a pension are the actual underlying investments themselves. When you put money into a pension pot, that in turn gets invested. It could be cash, it could be stock markets, or it could be other types of investments. Some are more risky than others. If you invest in stock markets, you are susceptible to a crash. This is not a problem if you're investing for maybe 30 years or more, but it could be a problem if you're looking to retire in the next 5 to 10 years.
What additional costs are involved in pensions?
When you invest in a private pension, there are generally two types of costs. There's a cost for the pension wrapper itself, and then there's a cost for the actual investment you choose to hold within the pension. The good thing is that with the advent of stakeholder pensions, most of those wrapper costs have fallen by the wayside. This means that pensions have become very cheap and in many cases, low cost, and a good value for money.
Does having a private pension affect how much state pension I get?
A state pension is totally independent of any other pension income you might get. So the good news is no, personal pensions don't affect it. The only thing to be aware of is the pension tax credit, which in a way is an extra bonus on the state pension for people with no incomes. It can be affected, so you just need to bear that in mind.