By Kay Brown
Many of us worry about the future, but this is a lack thought form. By saving for our future, we believe that we will not have enough. Ninety percent of the world struggle financially and may not be able to save a pension for the future. So is it better to plan for the future, or live for the moment. Life is precious and it can disappear at any time, through an accident or illness. However, this is why we can write a will. All of the monies paid into a pension will be payable to our loved ones when we die.
The advantages of private or company pension
In the past, most employers offered a pension plan. An employer in the public sector may match the amount that is paid into a pension. One of the advantages of paying into a pension each month is the tax relief. The pension is deducted off your gross sum. The difference in tax may only be a £10 in savings per month, but this amounts to a saving of £140.00 per annum; this is better in your pocket than the taxman’s. However, national insurance contributions are not deducted off your gross wage, but what you pay into your pension will be tax free.
Start a pension too late in life and you may not have enough to live comfortably, especially when petrol and utility prices are at an all-time high in the UK. It is unbearable to think what it will cost to heat your home in thirty years, but hopefully if you plan early enough, you will be able to retire in comfort, rather than poverty.
There is a difference in a personal pension, as you will pay income tax on your gross wage before the pension contribution. However, your pension provider will reclaim this tax from the government and pay it into your pension pot. High rate taxpayer can reclaim the tax by writing a letter or phoning their local tax office.
Another benefit of paying into a private or company pension plan is the compound interest. The earlier you begin saving for your pension, the greater your overall return. After the first year of paying into a pension you will make a return on the original sum, plus also make a return on your first year. After ten years, you will make a return on the original investment, plus receive nine years of returns. Remember that this pension amount is tax free, although only twenty five percent of that lump sum is tax-free.
The disadvantages of private or company pensions
If you are adding twenty percent of your annual income into your pension and the going gets tough, it is impossible to access that money until you reach 55. However, the Government is in consultation about allowing individuals earlier access to their pensions. If you feel that you may need early access to some equity, consider also opening an individual savings account, which will allow you to save over £5,700 per annum tax-free.
Another downside of regularly paying into a pension is the risk of a poor return. This occurs because a pension is invested into the stocks and shares market. The ‘life-styling’ scheme pulls the investment away from stocks and shares and into fixed interest bonds, a lower risk investment. The return may not be as high, but if you are close to retirement age, this may be a healthier option. The last thing you need is for your hard earned pension to perform poorly on the stock market.
Finally, saving for a pension can be easy, but the complicated part comes when you must decide how you want your pension to work for you. The first twenty-five percent of the pension is tax-free, and annuity rates are currently low. There are different types of annuity and it can be costly to consult an expert.
The best thing you can do before starting a pension is to look at it from all angles. Consider the pros and cons, and if you do not wish to pay into a pension that maybe heavily penalised by the stock park, then consider the investment of property.
About the author: Kay Brown is a writer who believes that a pension is an important lifelong choice. Pension reviews are a helpful aid for anyone who would like further advice on pensions.