Why You Need a Pension

As you are busy spending on necessities or splurging on the many luxuries that life has to offer, do you spare a moment to think about your twilight years?

Yes, we are talking about retirement when you will no longer have a fixed paycheck every month.

SEE ALSO: When Can I Retire?

The horrific irony is that if you do not plan for retirement, you risk losing the very lifestyle you are so accustomed to.

That designer dress, a faster car, the holiday to an exotic beach location, everything will become unattainable due to lack of income that can sustain it.

To add to this, you have increased life expectancy, rising healthcare costs, caregiving to a loved one or dependent children (if applicable).

This brings us to the question: Do you need to save for a pension or can you and your partner depend on state pension to live life in luxury? Another option would be a Family Income Benefit Policy.

While the state does have a safety net in place to ensure that nobody has to live life in poverty during their retirement years, it cannot be considered enough to sustain a lifestyle that most Britons would consider comfortable.

Here’s a basic figure to help you understand.

Currently, the most you can get from a Basic State Pension payout is £122.30 per week. That means, if you are eligible, you get around £6300 a year.

Is that enough to live a life of luxury? Not even close.

Thinking about Pension Plans

If you still haven’t started, then this is the perfect time to start thinking about Pension Plans.

Apart from being an absolute necessity if you are serious about not being dependant on State Benefits or your children for that matter, then you must start investing in pension plans.

Pensions have numerous advantages too. Here are some of them:

Tax Benefits: Payments made into a Pension fund receive tax relief from the HM Revenue & Customs (HMRC). While ‘tax relief’ may not sound like a compelling reason to start shaving-off a significant amount of your income each month, the effect of tax-free money accumulating over a long period can be immense. The earlier you start contributing, the better because it gives your money more time and potential to increase. Also, the more, the merrier.

Employer Top-Ups: To help people save more money for their retirement, the government has now made it compulsory for employers to register eligible employees into a pension scheme automatically. This is called Automatic Enrollment and is gradually being phased-in starting with the largest employers in the UK. Since your employer will also be making contributions towards your pension (depends on the scheme), opting out of the employer pension scheme is like turning down a pay rise. Unless you have unmanageable debts and can not afford to contribute, you should join your employer pension scheme. Also, some employers make contributions to the pension irrespective of whether the employee does. In this case, you should enrol and take advantage no matter what your financial situation is.

Tax-Free Cash: A quarter of the Pension Pot you build up can be used as a Tax-free Lump sum cash amount. It depends on the rules of the pension scheme and the tax allowances available to you. But let’s say you accumulate £200,000 in your pension pot, you may be eligible to receive £50,000 as tax-free cash. Following the sweeping changes in Pension rules introduced in April 2015, you can also choose how you use the pension if you have a ‘Defined Contribution Pension Plan’. It can be used as a single cash lump-sum or in parts; it can be used as a drawdown plan or as an annuity. If you have multiple pension plans, you can also choose a combination of the above options.

Varied Investment Options: Depending on the type of pension scheme you choose, you can create a diverse portfolio of investments which can grow over your lifetime. Equities, property, funds and bonds, you have multiple options to choose from.

Remember, contributing a part of your monthly income towards your pension may seem like a challenge at the moment, but it has its rewards and benefits. Make small sacrifices today, and it will have a significant difference in the life you lead once you retire.

If you still have questions in mind, you may look at our Complete Pensions FAQ.