What is a pension plan – and why we need them
A pension plan is a long-term investment to provide you with an income in later life.
A pensions plan can be taken once you reach the age of 55, and can provide you with the financial freedom to end full-time work, in favour of a part-time working life, or to give up work completely.
With increasing longevity, we must now contemplate the real possibility of living well into our 80s. However, for most of us it is doubtful that we will wish or be able to work until that age. Pensions plans can give us the freedom to choose when we step back from our working careers, and into a life of leisure.
Your pension plan is, therefore, perhaps the most important investment of your life. Quality pension advice should be taken, on a regular basis throughout your life, to ensure your pension plan is well-adjusted and on track to fulfil its primary purpose – to provide your financial security in old age.
Act now to set up or check your pension plan. Submit a pension advice enquiry now.
There are various types of pensions plans, but all have certain characteristics in common.
Contributions to a pension plan attract tax relief at your marginal rate. This means that a 20% taxpayer will have his pensions contributions topped up by 20% by the Government, and a 40% taxpayer will receive tax relief at 40%. This is a tax advantage that is unique among savings and investment products, making a pension plan the absolute best deal, when saving for old age.
Pensions plans can come as a company pension or employer pension plan, or a personal or private pension plan which you set up yourself, with the help of your financial adviser.
Pension plans lock away your savings. As mentioned, you may not access them until you reach the minimum pension age of 55. This feature of pension plans is intended to give your pension savings sufficient time to grow. Pensions plans invest your money in the stock markets, and benefit from the fact that stocks investments usually outperform cash in the longer term.
In fact, it has been calculated that due to compound growth in a pension plan, a £1 contribution paid in at the start of your career can grow to £28 by the time you reach 65. This is why pension plan experts sum up retirement planning by saying: ‘It is the first pound you invest, that earns you the greatest return.’
By making monthly contributions to a pensions plan, you build up a pension fund or ‘pension pot’ over the course of your working career. When you come to take your pension, you can take 25% of the funds in your pensions plan as a tax-free lump sum on day 1 of your retirement. The remaining funds in your pension plan can then be used to buy a pensions annuity, which then pays out a monthly income to you for the rest of your life.
