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What is a pension?

What is a pension?


A pension, in short, is a long-term savings plan which allows you to save a pot of money for your retirement.

When you choose to retire and stop work, your income will reduce or stop, and a pension is a way of funding your expenses at this stage in your life.

There are various types of pension schemes available. Part of what we do is help you understand what you’ve already got in place including your entitlement to a State Pension.

We also look at alternative retirement funding options such as ISA’s and other assets you may have available to you.

How does a pension pot work?

A pension is a tax-efficient method of saving for your future. Subject to certain allowances you receive tax relief on the money you pay in, which means that the government are boosting your contributions. This is by 20%, if you are a basic rate taxpayer, though it can be as high as 45% depending on your tax status.

This tax relief makes a pension different to other products where tax relief isn’t available. In addition, you’ll also benefit from the concept of ‘compound interest’ or earning interest on your interest which helps give your money the potential to go further over the long term.

The money that you’ll save is usually invested into assets such as fixed-interest securities, stocks, and shares or alternatives such as commodities. How you invest your money will be dependent on your attitude to risk and may change over time.

You may wonder, are pension schemes worth it? Understanding risk is a key part of retirement planning and a topic a Financial Adviser can discuss in-depth, to help individuals make an informed decision.

The key benefits of investing in a pension are:

  1. You will receive tax relief from the government on your contributions, subject to certain allowances;
  2. You can invest in a way that suits you;
  3. You can access your pension pot flexibly when you retire and benefit from up to 25% tax-free cash if you choose.

Planning how much you’ll need to retire


It is often asked, what is a good size of pension pot for retirement? The truth is, there isn’t a one-rule-fits-all when it comes to the amount in your pension pot at retirement.

It’s important to discover how much income you’ll need to live in retirement, based on personal circumstances, to determine a sensible amount.

And even then, with life expectancy rising – there are no guarantees that you’ll achieve the amount you need, but it is important to explore all pension options available, nonetheless.

To give you an idea of how much income you may need to enjoy a comfortable retirement, below St. James’s Place explain some recent data produced by Retirement Living Standards.

This will help you to think about how much income you would like.


Types of pension options explained

In the UK, there are two main types of pension schemes available.

These are:

  1. Defined Benefit

These are schemes offered by employers to provide you with guarantees about the level of income you will receive. This will be based on your earnings, and the number of years you have been in the scheme.

Having guaranteed income in retirement can make it much easier to plan and budget. The only slight disadvantage to these schemes is that they may not be as flexible as you would like, and they may not help you leave the legacy you want for your loved ones.

  1. Defined Contribution

Defined Contribution schemes focus on the amount that you are paying in. How much you get back at retirement, will depend on the amount you have saved, how it has been invested and how you decide to access the money.

These schemes offer an abundance of flexibility and can be used to plan your legacy. The disadvantage however, is if you haven’t saved enough, or the fund has not performed as well as expected, you may not be able to enjoy the level of retirement you were hoping for.

You can hold as many pensions as you want.

Achieving your pension goals


It’s never too late to start planning for retirement as every penny counts, but the longer you leave it, the more you will need to save to meet your goals. For that reason, Financial Advisers encourage individuals to start thinking about their retirement plan as soon as they start earning a living.

Tomorrow can feel like a long way away but with careful planning that spans the whole of your career, it is possible to build towards the pension pot you would like. In this blog, we talk about the importance of starting a financial plan.

For more help and advice or to receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, contact Yorkshire Financial Planning on 01482 275540 or complete our contact form here.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief generally depends on individual circumstances.

Any tax relief over the basic rate is claimed via your annual tax return.

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