Below are details on saving for your retirement, from the different pension options available to alternatives to pensions.
How do I start saving for retirement?
Are you starting to think about saving for your retirement? Whether you’re considering a pension and/or ISAs, there are a number of ways to financially prepare for your golden years.
Make a start on your retirement savings by weighing up the different savings options available, and considering how much you can afford to stow away each month.
What are the different types of pension?
The State Pension
A State Pension is paid by the government and offers a secure income that increases with inflation. You will receive a State Pension once you have reached State Pension age. Your age of eligibility depends on when you were born and your gender.
To be entitled for a state pension, you will need 35 years’ worth of National Insurance contributions. These 35 years are known as qualifying years. From April 2019, the state pension is £168.60 per week.
The State Pension age is currently under review and subject to change. To find out when you will be able to receive a pension, try this tool.
Defined benefit pensions
A defined benefit pension, otherwise known as a final salary or Career Average Valued Earnings pension, is a salary-related pension. The amount you are paid is based on how many years you have worked for your employer and your salary.
Your employer is responsible for contributing to the scheme and making sure there is enough money when you retire to pay your pension income. If you choose to do so, you can also contribute to this scheme as well as your employer.
Defined contribution pensions
Otherwise known as money purchase pensions, this pension involves building up a pot which you can then withdraw retirement income from.
Unlike defined benefit schemes, the income you get from a defined contribution scheme depends on the amount you pay in, the fund’s investment performance and the choices you make at retirement.
You can access your pension pot from age 55. At this time, you can choose to:
- Take up to 25% of your retirement pot as a tax-free lump sum and convert the rest into taxable retirement income. This is called an annuity and guarantees a regular income for life or a set number of years.
- Reinvest your pension pot to provide you with a regular income. The income you gain from this will vary, depending on the fund’s performance. There is also a risk that the fund will run out.
- Take your whole pension pot in one lump sum. 25% of this will be tax-free, but the rest will be added to your income for the year and subject to Income Tax. If you are a non-taxpayer or basic rate taxpayer, accessing your pension in this way could result in paying tax at a higher rate.
- Take out lump sums as and when you need them. Each time you do this, 25% will be tax-free but the rest of the lump sum will be subject to Income Tax at your marginal rate.
The value of investments and any income from them can fall or rise, and you may not get back the original amount invested.
Both HM Revenue and Customs practice and the law relating to taxation are complex, and subject to individual circumstances and changes which cannot be foreseen.
How do I start a pension?
In many cases, you don’t need to start your own pension because of automatic enrolment. Automatic enrolment is a Government initiative that helps people save for later life.
It’s now compulsory for employers to automatically enrol their eligible workers onto a pension scheme, and for employers and workers to pay money into this scheme. For more information on automatic enrolment and to find out if you’re eligible or not, refer to the Pension Advisory Service.
If you’re contributing to a pension scheme offered by your employer, check whether it’s a personal pension scheme or an occupational pension scheme. These are two different avenues of retirement savings and offer different benefits.
Alternatively, you can set up a personal pension. You may choose to do this if you’re self-employed, for example. To set up your own pension, you will need to find a scheme that suits you and your circumstances. One factor to consider is that you will need a provider who allows you to contribute as and when you can, as your income may not be as predictable as those with a salary.
We offer free Pension Clinics at all of our branches with Newcastle Financial Advisers. These sessions are perfect if you just want to ask a few questions and see what you might need to do next. Simply complete our online form to book a session at your nearest Newcastle Building Society branch.
When do I get access to my pension?
If you have a defined benefit scheme, the normal retirement age is 65. With a defined contribution pension scheme, you can usually start taking money from the age of 55.
At this point, you may choose to use the money to top up your salary (if you’re still working), to allow you to work fewer hours or to even retire early. Doing this will reduce the total amount you are allowed to continue paying into a pension if you choose to do so.
However, there are some circumstances when you can request access to your pension early. For example, if you’re struggling with health issues or you’re in a profession with an early retirement age. If you feel you’re eligible for early access to your pension, you should contact your scheme administrator as soon as possible.
Alternatively, some people choose to retire later than the minimum retirement age. In this case, if you have a defined benefit scheme, you may need your employer’s or the trustees’ permissions. Your pension may be higher if you do retire later. Your pension scheme’s rules will tell you how your pension will be calculated, if you opt for a later retirement.
What is a Lifetime ISA?
As of April 2017, the government launched the Lifetime ISA as another way to help you save for retirement. If you’re between the ages of 18 and 40, you can open a Lifetime ISA and pay in up to £4,000 each tax year, and the government will add an additional 25% bonus.
Here at Newcastle Building Society, our Lifetime ISA helps you make the most of your later years. If you’d like to find out more about opening a Lifetime ISA, check our handy FAQ’s page or get in touch today.
When can I access my Lifetime ISA?
You can make full or partial withdrawals from your Lifetime ISA, without having to pay a fee, if:
- You’ve reached the age of 60
- You’re diagnosed with a terminal illness
At this point, you won’t have to pay any tax and you can use the money for whatever you want. If you take money out of your LISA for any reason other than the above, you will have to pay a withdrawal charge.
Many people choose to invest in a LISA as well as a pension scheme. However, Cash ISA’s are another way to save for retirement. To find out more on this, check out our guide. If you think a Junior ISA is the best option for your child, you will need to choose the type that’s best for you; whether this is a cash ISA, stocks and shares or both! Once you have an idea of the kind of ISA you’re interested in, you simply need to contact your bank or building society to apply.
How much do I need to save for retirement?
A recent survey by Which?* revealed the average amount a retired couple spend each month is £2,200. However, retirees often find they have less outgoings in retirement because they have already paid off their mortgages and no longer have to support their families, commute to work etc.
If you’re dreaming of spending your retirement enjoying holidays and leisure activities, you will naturally have to accommodate for this when making contributions to your retirement savings.
When it comes to saving for retirement, it’s best to start as early as possible. The sooner you start to put money aside, the faster your nest egg will grow and the more comfortable a retirement you will be able to enjoy when the time comes.
It’s never too early or too late to start saving for retirement. For more information on the right way to save for retirement for you, get in touch with Newcastle Financial Advisers today for helpful, expert advice.
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