ON Tuesday just past we celebrated Pension Awareness Day, an annual event where we are nudged to think about our most wonderful financial possession: our pension.
Of course, you can only join in on this joyous occasion if you actually have a pension. Here are some good reasons why you may want to get one sorted.
A pension is the absolute best way to save money for your future. There are three main types of pension: the basic state pension, which you fund with your national insurance contributions; your workplace pension which is organised at work and which you pay jointly with your employer; and a personal pension, which you start and pay by yourself.
At a time when most savings accounts don’t even keep step with inflation, money held in bank accounts and easy-access cash Isas is often actually losing spending power. The best easy access cash rate at the moment is Coventry Building Society’s underwhelming 0.96 per cent, and you could be forgiven for not wishing to partake.
Nobody ever objects to a bit of free money, however, so how about a long-term savings product that slaps an extra quarter on your savings right at the start? Does that sound too good to be true? Well, that’s what a pension does.
If you are paying tax at 20 per cent, and that nice taxman sees that you have saved £80 into your pension this month, he immediately tops it up by £20, total making £100, all invested for your future and gaining interest from the word go.
Over the years, that can balloon into a mighty sum, and the longer it’s invested the better, so the motto is: save early and often!
You also don’t have to wait until retirement age, to have access to your pension savings. From 55, you can withdraw a quarter of your savings at that point, tax-free, to get around to your bucket list, before you kick the bucket. No point in being the richest man in the cemetery, as they say.
On the other hand, you could well be wiser to leave your pension alone at this stage, so as not to deplete the funds you will have when you finally do hang up your toolbelt, or stethoscope, or deep-sea diving outfit (or all three) for the last time. Your financial adviser can advise you on that.
It could be an important conversation, too; every year we see new surveys that repeatedly show the large gap between the income we’d like to have in retirement, and the income we would get from what we’re saving now.
The latest one, by Unbiased, showed that a pension pot of £100,000 won’t get you much more than £7,000 a year of retirement income at current rates, and that to achieve an income of £20,000 you’d need the full state pension (ie 35 years of NI contributions) plus a pension pot of £170,000.
Again, your financial adviser can help you plan today, to ensure you are saving towards the lifestyle you’d like then, so that the world cruise you dreamed of isn’t downgraded to a rainy week on a rented barge!
Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. Further information on Facebook at “Kennedy Independent Financial Advice Ltd” or at www.mkennedyfinancial.com
