Category: Pensions

Pensions

Choosing the right time to Start Pension Planning

We all know the importance of making sure that we have enough money to help us to be able to retire comfortably. It would be lovely to think that we could continue to live in our current home with enough money to cover all of the bills and to have a good time and perhaps even take some holidays from time to time. However, in order to do this we will need to have a pension to pay for it. We will need to think about how we will be able to get that pension.

What is a pension?

In order to have a pension we need to invest money so that when we reach retirement age we will be able to cash it the money and buy an annuity which will give us pension payments each month. If we want to maintain our standard of living then we will need to make sure that we are paying in enough so that we can get enough back when we need it. However, there is no avoiding that nagging feeling that maybe you will not be able to enjoy that money in the future, perhaps if you do not live that long or if you are in ill health and so it is tempting to spend it. One way to protect against losing the money is to set up the pension so that it can go to someone else if you cannot draw it. This would normally be a spouse but it could be children or even parents depending on what close family you have. You can usually change this during the course of the pension if you relationships with people change.

Personal/Work Pensions

With personal and work pension payments, you will make regular monthly payments into a fund. You will not gain interest in the way that you do with savings, but the value of the fund should increase over time. It tends to be invested in the stock market which overall will increase in value over time. There is likely to be a fund manager which will make sure that money is invested as wisely as possible. There is still a risk, just like there is with payday loans, but this should help your money to grow in value over time. The longer the money is invested the more time it has to grow which means that you will have a bigger pot when you retire. Alternatively, you will be able to invest less each month and get the same return if you invest for longer. For example if you pay in £1 a month from the age of 20 until you retire at 70 you will have paid in £600. However, if you wait until you are 50 to start paying in, you will need to pay in £2.50 a month in order to accumulate the same £600. So by delaying, you will end having to pay in bigger chunks of money. This is not the full story though, as that money is invested for less time, it will grow less, so it is likely that you will need to pay in even more in order to have to the same pension post size when you retire. It is hard to do an example of this as growth is not always the same and of course, the money you pay in early on will have much longer to grow compared with the money you pay in later in life.

Benefits

Even from this simple example, you will see that you can benefit in a lot of ways from starting to pay into a pension nice and early. It can be wise to start thinking about pensions as soon as you join the workforce and then you are far more likely to have a good income in retirement. It can seem a very long way away but once you get toed down into buying houses and having children you may forget all about it and then it may be too late to put aside enough for you to manage on. You may be paying into a government pension, but that is only a small amount and is unlikely to keep you in the lifestyle that you are used to. It also seems lately that governments are running out of money, so there is a risk that in the future they decide to reduce pensions or do away with them and so there is no guarantee that you will get that money back, although hopefully you will.