Saving for Retirement What are Your Options?

by

Izzy Evans

With more and more people expecting to work to a much older age as a result of increasing life-expectancies, the importance of funding retirement and managing your pension has become progressively more significant. Especially as if you make wise decisions regarding your funds you can take an earlier retirement. Pensions are generally the key idea when thinking about retirement and the future, but there are a wide range of options available to you.

The most common option is the State Pension. If you are currently working and paying National Insurance Contributions, these payments are going towards building up to a basic State Pension. You will receive a State Pension when you reach the State Pension age currently this is 65 for men and between 60 and 65 for women. However, the age for women has been gradually increasing in stages since April 2010 and will continue until November 2018. By 2020 the age for both sexes will have reached 66, and could potentially reach 67 by 2028. As of the 2012/2013 tax year a person who has a full National Insurance contribution record will receive 107.45 a week. The State Pension is an automatic way of saving for retirement as if you are working your National Insurance contribution is taken out of your pay every month. This, then, is likely to be an amount that the majority of people should receive once they retire. What you will need to think about is saving for your retirement on top of the State Pension.

Most companies will run a pension scheme and these schemes fall into two categories schemes that the employer makes a contribution to and schemes that they do not contribute towards. Defined Benefit Schemes (or DBS) are calculated using the number of years you have been a member of the scheme, your salary at retirement or final salary and the proportion of earnings you receive as a pension for each year you are a member. Employers contribute to the scheme to make sure there is sufficient money. Unfortunately many companies are stopping these schemes as they are expensive to maintain.

Defined Contribution Schemes (or DCS) is where you contribute a percentage of your salary into a fund. This fund is then invested in the stock market or the bond market. The aim of a DCS is to grow your fund over the years before you retire. Upon retirement you can take some of the cash as a lump sum and use the rest to by an annuity (an annual retirement income). Some employers will make contributions to this fund, although generally they can choose how much to pay in, with some employers choosing to match your contributions.

You can also choose between personal pensions. A personal pension is where you make contributions to a fund that is managed by a pension provider. The fund is invested in stocks, shares and investments and, like a DCS, aims to have grown by the time you retire. An alternate to this is a Self-Invested Personal Pension (SIPP) where you have higher amounts of control. You can choose your investments and switch between them. SIPPs can have higher charges than other personal pensions and are generally used by people with larger pension pots. However, the costs have been reduced in recent years, making SIPPs more accessible. A further type of personal pension is a stakeholder pension. This type functions in much the same way as other personal pensions, the fund is invested and once you reach retirement you can use it to buy an annuity. Stakeholder pensions are generally more advantageous for those who are self-employed, those who don t pay into a company pension or those who do but want to top up their retirement fund.

Finally, an option more people are looking into is an ISA. You can choose between a Cash ISA or a Stocks and Shares ISA. They are becoming increasingly popular as an alternative to a pension scheme as a result of their tax-free nature. Both cash ISAs and Stocks and Shares ISAs are tax efficient and a Stocks and Shares ISA functions in a very similar way to many pension schemes. With a Stocks and Shares ISA (or SSISA) your money is invested in the stocks and shares of companies. Currently the highest amount you can put into a SSISA each year is 11,280 and you do not have to pay capital gains tax or income tax on any profits you make on your investments. Many people are choosing to invest in both a SSISA and a pension scheme as the money is spread over a number of investments.

Looking after your retirement plans is vitally important as you are looking after your future; many experts say that you should start saving as soon as possible. You will need to think carefully about your options. This article is meant as an introduction to the most common options available, you may find that going down a different path is more suitable for you. Some people invest in property and rent out or sell to fund their retirement; others choose to rely on inheritance from family members. Whatever you decide to do to save for retirement make sure you have researched it thoroughly and that it is right for your needs.

© Izzy Evans 2012

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