A pension is one of the most common and most useful financial plans that will provide a predictable source of income upon retirement. In general, the way they operate is relatively straightforward. Throughout one’s life (primarily during employment), an individual will contribute a certain amount towards a pension during each pay cycle. When the retirement age is reached, this money can then be used to pay for various necessities. Examples can be utilities or a mortgage. Additionally, the money from a pension can be reinvested to provide an additional source of income.
Types of Pensions
In the United Kingdom, a pension can be placed into three different categories. These are occupational pensions, personal pensions and stakeholder pensions. An occupational pension is supplied by an employer while a personal pension is chosen based upon one’s own needs. Finally, a stakeholder pension involves investing money that is saved during one’s working life. The profits realised from this fund are then used to purchase a pension from the most relevant provider.
Furthermore, a concept known as a pension arrangement is important to understand, for it will determine how the funds are distributed and one’s tax liabilities. A common arrangement is known as a money purchase scheme. In essence, the money enjoyed upon retirement will depend upon how much was put away and where it was invested. On the contrary, a defined pension arrangement will allow the consumer to know exactly how much money to expect. This is normally a predetermined figure; derived from one’s pay and length of employment.
Things to Take Into Consideration
There are a few key areas that need to be calculated in order to choose the right plan. Will the pension be cost efficient? In other words, is the post-contribution pay enough to live off of until retirement? As most pensions are a form of investment, how will they perform? Where is the money allocated and what margin of security is available? Some of the most trusted pensions will invest in blue-chip companies as well as long-term commodities (these are considered more stable than high-risk positions).
How to Get the Best Deal
The hallmark of a reputable provider is one that offers their customers a number of different pension options. As cancelling a scheme early can come with stiff penalties, it is essential that all questions are addressed transparently. Other tips include:
- Speaking with a financial adviser who is familiar with pension schemes.
- Obtaining independent reviews of the company in question.
- Enquiring to an employer in regards to any existing plans that may prove beneficial.
- Understanding the tax obligations associated with a specific plan.
Pensions can be ideal investments. If chosen with clarity, the “golden years” of one’s retirement can be enjoyable and fruitful.