Pick a pension pot to protect your future

Choosing the right pension can make a big difference to quality of life during retirement

Choosing the right pension can make a big difference to quality of life during retirement

Kevin Porter

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Saving for when we retire is something we all know we should be doing – but many people still put it off.

This head-in-the-sand approach to pensions is partly explained by the bewildering range of schemes and options on offer.

And there is certainly no shortage of headscratchers for anyone trying to get a grasp on the subject.

Is the basic state pension enough on its own? Do you have to enrol in a scheme at work? And would a private pension be the right choice?

Needless to say, some people never get to grips with these questions and find themselves in a difficult position come retirement.

The problem has become so serious that from October this year the government will require employers to automatically sign workers up to their company schemes – if they have them.

This will mean you have to opt out, rather than opt in; potentially providing extra protection for the millions of people who would gladly sign up to what their employers are offering, but just never get around to it.

When you will be enrolled depends on the size of the organisation you work for.

Very large employers are doing it first, in late 2012 and early 2013, while others will follow over several years.

· What are the benefits of a workplace pension?

Having a pension at work means your employer will pay into it, which allows it to build up more quickly than if you were saving on your own, and the government will also pay into it in the form of tax relief.

This means some of the money you earn, instead of disappearing as income tax, will go into your pension. Your workplace pension belongs to you, even if you leave your employer to work elsewhere.

As your employer will automatically enrol you into this pension, it’s a hassle free way of saving while you earn.

· What about state pensions?

The state pension is a regular payment you can receive when you reach the qualifying age. It is based on your national insurance contributions and how much you get varies.

Once you claim your state pension it gives you a regular income for the rest of your life – but it is unlikely to be enough on its own to give you a comfortable lifestyle.

In 2012/13, a single person can receive up to £107.45 a week, though some people get less than this and some get more because they also get an additional state pension.

You may be contributing to, or receiving credits towards, the additional state pension if you’re below the state pension age and claim child benefit, carer’s credit or other benefits due to illness or disability.

Other things can add to your state pension, such as inheriting part of a spouse’s pension. But you definitely won’t receive any top-ups if you’re self employed.

· Why have a personal pension?

Personal pensions allow you to build up a pension pot with a bank, building society or other provider and buy an annuity when you come to retire.

This will provide you with a regular source of income in older age, but there are far more options and variables involved than with employer or state pensions.

Unlike company schemes, many personal pension schemes will let you vary your contributions, paying in more when you are able to and taking a ‘contributions holiday’ when times are hard.

Personal pensions also enjoy tax relief when you pay into them, allowing you to increase your pot and maximise your returns. But they don’t avoid tax altogether, since pension income is taxable.

They also allow you to take a 25 per cent lump sum tax-free when you retire. This will lower your regular payouts, but does provide the option of paying off debts or investing separately.

Personal pensions are also portable; unlike company schemes that people often leave behind when they change employer, you can keep the same personal pension.

· Drawbacks of a personal pension

Unlike company pension schemes, most personal pensions are self-funded, so there is usually no employer’s contribution to boost your pension pot.

If you become an employee of a firm that runs a contributory company pension scheme you may do better to join this instead of going it alone.

Personal pension charges can also be higher than those paid by workers and can offer limited investment choices.

For more information about all kinds of pensions visit direct.gov.uk.

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