Pensions & Retirement
The State Pension
The basic state pension will rise to no less than £151.25 per week (£655 per month) in April 2016. If you reach your state pension age on or after that date you will receive the new amount. The amount you get will be calculated against your National Insurance record. You will need 10 qualifying years to get any new state pension and the amount you get can be higher or lower depending on your National Insurance record. You will need 35 qualifying years to get the new full state pension.
Retirement is simply stopping work than deriving an income from employment, self-employment, partnership, or other pursuit that provides for your lifestyle. In order to stop working, most people need some way of paying for lifestyle during retirement. This usually means either a pension fund an investment that is capable of providing an income or withdrawal of capital over retirement years.
Therefore, it is not necessary to have a pension in order to retire. In fact many people invest in other investments such as residential property or businesses in order to derive an income that provides a suitable quality of life when they stop work.
However, for the majority of people the pension is a sensible place to build up capital in a tax efficient manner and that can be used to provide an income when they stop work.
Pensions are extremely tax efficient and are the best form of saving for the longer term. They are a form of savings plan, with tax efficient incentives that make them attractive for those planning their retirement.
You can pay as much you want into a pension. You receive tax relief on your contributions which make this form of saving very tax efficient, especially for higher rate taxpayers. However, this subject to limits and also the total amount you can hold in a pension scheme has an upper limit and saving above this limit becomes less tax efficient.
The main aim about saving into pension, as with all investment is to make the amount you invest grow so that you get back more than you put in in real terms.
You are able to invest in a wide range of investments across the different types of risk, from cash deposits through to investment funds, share portfolios, gilts and corporate bonds and commercial property. Where you decide to invest will be determined by the amount of risk you wish to take and the potential loss that you may incur on the investment. This in turn may be determined by how long you will invest for and therefore you need to take account of volatility in any particular investment you decide to utilise within the scheme. How you invest will also be determined by whether you decide to buy an annuity when you retire use the fund to draw on, drawdown.
The reality is that nobody can afford not to invest in a pension as the state pension will not provide sufficient income to cover the lifestyle of the majority of people in their retirement. As life expectancy is rising many can expect to be retired almost as long as they are working and therefore building up a capital sum to provide for that long retirement period is extremely important.
The other important aspect with regards to building up your retirement pot is that the earlier you start, the easier it will be and more fruitful retirement should be. This is based on mathematical fact and the cumulative effect of compound interest.