In the economically insecure times, we are currently living in, knowing that you have a secure pension fund is bound to offer great comfort, but what exactly does this involve and why is pension planning so important?
We have all heard of the concept and, especially for the younger generation, probably don’t give it much more than a fleeting thought, but it really is never too early to start thinking about your retirement. Opt-in early and you will reap the benefits in your later years.
Why is Pension Planning so Key?
The retirement age is rising all over the world thanks to more people living for longer. This increase in life expectancy has forced governments to increase the retirement age because of the financial implications on the state. People might be living longer but they are still becoming older and weaker and eventually are unable to work, which is why having a savings fund is so important. Saving throughout your working life will help you cope with the financial demands later in life when you are not receiving an income from paid work.
Why Opt in Early?
In the UK, 22 is the opt-in age for a pension scheme. You can, however, start paying into a fund when you are younger than 22 as long as you are earning a minimum of £6,136 a year. Alternatively, you can choose to go for a private fund where there is no minimum age requirement. Parents can also set up pension pots for their children while they are growing up. Mum and dad pay into these initiatives and then when the children grow up they take over. Up to £3,600 gross can be contributed into a pension without any income requirements, consequently this much can be paid in by parent’s to their children’s schemes.
Another alternative is to opt into a work-based scheme where you put in a certain amount of your annual wage and your employer does the same. All employers are required to offer this to their employees and you opt-in by default. If you do not want to be a part of the plan then you can choose not to be. The work-based option is a sound one since your employer’s contribution means that the accumulation is greater than if you were just paying yourself.
If you choose the private company option, the younger you begin to contribute to your pension planning pot, the younger you are able to retire. As with most of these options, the longer the period of contribution, the greater the potential accumulation.
Impact on Retirement
Theoretically, sound pension planning equals a comfortable retirement. Some people choose to leave work early, at 55 for example, and if they have been paying into a pot from an early age, they may well be able to. Others choose to work until the minimum retirement age and then live the best they can on what they receive from their monthly payments. It can take time to adapt to retirement, as your monthly income may reduce substantially, but the better plan you have in place the better your lifestyle in retirement will be.
It is always recommended that you seek out a professional advisor when thinking about saving for your later years. You want to get the best return on what you are saving so make sure you investigate all your options.