This is the first in a series of articles that I hope will explain pensions in a way that everyone can understand.
If you’ve not yet reached retirement age then pensions are not the most exciting of subjects to talk about. However, you have to plan well in advance to make sure you receive a sufficient pension for a comfortable retirement. My aim is to give you the knowledge you need to make the best possible plans for your future.
Saving for your Retirement
Throughout your working life, you pay for a state pension with your national insurance contributions. Even if you have no breaks in your employment history, when you retire the amount you get from a state pension is not going to provide you with much more than life’s bare essentials.
If you want a decent standard of living when you retire you should consider a pension of your own, (a private pension) from which the income can be substantially greater than the state pension.
If you wanted to, you could save for your retirement by regularly putting money into a savings account.
When you retire you use the money in this account to pay the bills.
The main problem of doing it this way is that you don’t know how long you are going to live for. Once the money has gone, it’s gone. So how do you budget when you don’t know how long the money has got to last?
The solution to the problem is to put your money into a pension because then, your money will never run out. A pension will pay you an income for life and if you live to a ripe old age, you’ll have the satisfaction of knowing that you are taking out much more than you ever put in.
Pensions – a tale of two halves
You can buy a private pension from one of many providers but it is important to note that there are two distinct stages to each pension:
1. The paying in stage: you pay regular monthly amounts to a pension provider who will invest the money on your behalf, building up your ‘pension fund’
2. The paying out stage: when you retire, you use the money in your ‘pension fund’ to buy an ‘annuity’. An annuity is just another name for the part of the pension that will pay out a secure, regular income (your pension) for the rest of your life.
You do not have to buy an annuity from the same pension provider that you have been saving with. All annuities are not created equally so it pays to shop around and buy your annuity from the provider that offers you the best income.