Pensions: The Need-to-Know Guide

Pensions. A concern for the older generations? Another deduction from your pay packet? Or a golden opportunity to secure your future?

The world of pensions can be an overwhelming and confusing affair to the eyes of the unknown. With so much emphasis on saving now, it can sometimes be impossible to think of saving for your future.

Whilst the current economic climate is somewhat unstable to say the least, the new NEST Pension Laws implementing the auto-enrolment of employers and their employee’s onto singular workplace pensions aims to revitalise the way we save.

October’s New NEST Pension Scheme

Whilst many may already have pension schemes in place, a resounding number of UK adults are still not contributing to their pension; fewer than one in three in fact! Which raises the question; why is this so?

The thick and thin of it can be traced down to the simple fact that many people are unsure about the purpose, function and benefits of pensions in both the short and long term. So what do you need to know?

  1. What is a Pension?

In Lehman’s terms, a pension is simply a ‘pot’ of money that you, your employer and the Government contribute to in order to secure your finances for the future.

There is no involvement from the taxman and it means that, come your retirement, you can draw money from your pension or gain annuity, a method of selling your savings to an insurance company for a regular income.

  1. Why should I set up a pension?

The real selling point, apart from saving for the future, is the tax relief. Depending on your rate earnings, you will receive an automatic percentage back. You can claim an additional percentage depending on your rate earnings.

This percentage you receive back is worked out with the earnings on your contribution amount before the tax was deducted, in which you will receive the difference between your contribution and your pre-tax earnings.  

  1. Auto-Enrolment & NEST Pensions…What’s this about?

As of October 2013, employers will be obliged to offer employees access to an auto-enrolment NEST Pension scheme. This is a recent introduction by the government to ease the strain on State Pensions as well as making people aware of the importance of saving for their retirement.

This auto-enrolment scheme emphasises the need for employees to save and is aimed at providing a sole pension. This pension stays with you throughout your employment career even if you change job, become self-employed or stop working. Simple.

  1. How much should I contribute into my pension?

How much you and your employer will contribute will depend on your annual income. 2% (of which 1% is from your employer) must be paid of your qualifying earnings (salary, overtime, bonuses etc) if you earn £5,564 or more, although these figures are annually reviewed.

Ideally, you should be contributing more than the minimum requirements in order to gain the benefits later on in life. The sooner you contribute, the longer your money has to grow. Whilst you are encouraged to put away more for the future, it is important to ensure your current financial security so make sure you find the right balance.

  1. Still unsure? Call in the professionals!

With changing percentages, fluctuating rates and a variety of saving options, it can be difficult to understand just how to look after and gain the most from your hard-earned money. So, when pensions are concerned, make sure you approach an established and specialist financial advice firm and with their experience and expertise, you can begin to save for the future.

When it comes down to it, saving for your future really should be one of your top priorities. The introduction of these new pension schemes, along with the emphasis on making employers and employees aware of the importance of early pension planning, really is a step in the right direction as we look to repair our economy and ensure our futures.

This post was composed by Phil Warrington on behalf of Guardian Wealth Management; a reputable and established financial advice company who specialise in offering advice on a variety of pensions as well as financial planning and investment.

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