Working out the finances
Whoever you ask, the advice is always to seek out the best possible professional advice about financial matters
Financial matters are crucial when someone retires or is preparing to retire. And the world of pensions can appear incredibly complicated.
The top advice for those facing retirement is to contact an independent, regulated financial advisor.
There are also plenty of websites available, including Pension Wise at www.pensionwise.gov.uk.
A pension is a savings plan aimed at building up money for your retirement. The money is paid in by you, your employer or both.
The most well-known scheme is the state pension. It is provided when you reach retirement age. The full state pension is paid to those who meet National Insurance requirements.
Men used to take their pension at 65 and women from 60. However, from 2018 women will only be able to take the pension at 65. The age is then set to rise to 66 for men and women by April 2020.
It is vital you know what your state pension entitlement will be and when it will begin.
You can go to www.gov.uk/your/ statepension and by following simple instructions you find out the details you need.
There are two types of private pensions that you can set up or that your employer may offer:
Defined benefit pensions are run by employers. These pay out a pension which is equal to the number of years worked for a company multiplied by a portion of the employee’s salary at retirement.
Known as final salary schemes, they take into account the employee’s salary before retirement. These schemes are usually generous and are distinguished by a set outcome.
When a man retires, his wife gets twice the husband but only half the income - Chi Chi Rodriguez.
Defined contribution pensions are commonly run by employers. Known as money purchase schemes, they are paid into by the employer and employee.
Although the amount contributed is a set amount of the salary, the final income is not guaranteed.
Personal pension plans can be set up by individuals whose employers do not offer schemes
and a group personal pension is a collection of personal pension plans set up through an employer.
Stakeholder pensions were introduced in 1999. These work in a similar way to personal pension plans, the individual responsible for contributing money to build up their pot.
A pension plan will not automatically pay out annually when you retire, you have to decide how to take the money to best generate an annual income. The most common way is by buying an annuity. The company pays you a regular income in return for your pension pot. The company pays out a level of income based on how long it thinks you will live.
Income drawdown plans allow investors flexibility over how they take their pension. Investors are able to reduce and increase the amount depending on circumstances, while leaving the remaining pot invested.
The income your pension provides will be taxed. Although you pay no tax when paying into a pension, you will have to pay tax when you take your money out. However, when you take your benefits at retirement, you are entitled to take 25% as a tax-free lump sum.
These are all basic facts in a complicated world. The deeper you delve, the more intricate matters become.
The best advice will always be to seek the guidance of an independent and regulated financial advisor.
Six million men and women will have to wait a year longer to get their state pension. The rise in the pension age to 68 will be phased in between 2037 and 2039, rather than from 2044 as originally proposed. Those affected are currently aged 39-47.