Sadly many women are unprepared for retirement. The Pension Gap is a major issue for many women, who have a fraction of what their male counterparts have in their pension pot. This is because they have taken time out to raise a family or had a lower paid jobs or have been divorced. Saving money into a pension is vital if you want to live a comfortable life in retirement. Given a third of all women in the UK have no personal pension in place (FT, 2019), here we are sharing some vital information on pensions and explain the basics.
What is a pension?
In simple terms, a pension is a pot of money you invest into throughout your working life. When you retire, it provides the income you no longer enjoy through working. Your employer, where applicable, may also contribute to your pension pot. It’s worth noting that your personal pension pot does not include the state pension paid by the government, therefore, the more money you save now, the more money you will have to spend in the future. If, like most people, you work for more than one employer during your career, you will almost certainly have multiple funds. All of these funds will be contributing to your retirement income, but we will talk about how to review your total pension pot below.
Why invest in a pension?
The first thing to remember if you don’t currently invest in a pension is, you are never too young to start. Pensions are not something to put off until you have kids, a mortgage and plenty of other bills. The earlier you start, the more you will save for a prosperous future. You could start a pension for your child now!
Many people give little thought to their later years.
Ask yourself:
- When will you be mortgage-free?
- How much money do you think you will need each month to pay your bills?
- Do you have dreams to travel, buy a holiday home, take up an expensive hobby?
- How much money will you need every month to live the life you want?
And remember, we are living longer than ever before.
Once you stop working for an employer or running your own business, you still need an income unless you have saved a very large sum of money. That is why pensions are so important. Your monthly contributions grow by being invested in funds designed to deliver returns that match your attitude to risk. You also enjoy the added benefit of tax relief on your contributions. This means some of the money you would have given the treasury is invested in your pension instead. Your pension provider or financial adviser will update you at least annually on how your fund is performing and what your retirement income is likely to be.
How do you start a pension?
Many employers now offer to enrol employees into workplace pension schemes automatically. If you get offered automatic enrolment, this means a percentage of your salary gets deducted and put into a pension pot for you. Even better, your employer also contributes a percentage! Whilst it may look like you are losing out on a percentage of your pay each month, this is an investment that will help secure your future.
Some employers will offer you a Group Personal Pension scheme. This scheme will be managed by a pension provider chosen by your employer, offering lower costs because of the number of people they cover. However, the pension will be a direct arrangement between you and the pension provider. Typically, your employer will normally pay a monthly contribution into your pension. Indeed, some people consider how much an employer contributes to their pension as a key factor in deciding whether to work for a company. There are various schemes with different benefits. It’s worth taking the time to understand what scheme you are part of and the benefits this scheme will deliver.
If you are knowledgeable about investments, or use an independent financial adviser, you may choose to invest into a self-invested personal pension (SIPP). It is very similar to the standard personal pension but gives you extra flexibility in where your pension fund is invested.
Why you need to review your pension
Once you have been paying into your pension for some time, it is important to review how it is performing on a regular basis. This way you can ensure you are on track for your retirement plans.
It is easy to set up your pension scheme and then forget about it. The fact is, you may change your appetite for risk as you get older, have more or less money to invest, or your funds may not be performing as well as others in the market. That is why it is essential that you review your pension pot at least annually.
This is even more important if you have several pension funds. Make note of all your pension schemes so you know your total pot. This also provides an opportunity to review integrating your pensions into one fund for convenience, ease of tracking, and increased performance. It is important to note that you should check the terms and conditions of the various schemes to ensure you do not lose out on any benefits from different providers.
Questions to ask when reviewing your pension
- What fees are being charged by your pension providers? If one is significantly more than another, it is a good reason to move your money.
- Have your retirement goals changed? If so, do you need to increase your contributions, increase your retirement age, or move to a higher performing fund?
- Are you prepared to take more risk to enjoy potentially higher returns? If so, you may wish to move your investments.
- Do you want to reduce your risk as you get closer to retirement?
- Have you changed employer or become self-employed? If so, get the right advice about starting your own personal pension scheme or whether to move your existing pensions into your new employer’s fund.
Get advice on your pension
It is well worth getting an independent financial adviser to help you review your pensions and make the right investment decisions. Advisers from the pension companies cannot give you advice themselves, they can only answer your factual questions. Do contact us if you need help and arrange a discussion about your pension.
If you are interested in finding out more about your pension pot, the Money Helper pension calculator is a good place to review your current situation. You can also check at what age you will be able to receive your state pension via the Gov website.
Hopefully, you can now see that investing in a pension is essential to leading a happy and prosperous retirement. It may seem like years away. But time passes very quickly. So please – if you don’t have a pension, start one now.
And if you do, have you reviewed it lately?
We can help with any aspect of retirement planning – just contact us
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