Understanding your pension

It is never too early to start saving for your pension

What is a pension?

We all have a general idea of what we would like to do in retirement, whether it’s playing golf, travelling or taking up a hobby.

However, in order to make those plans a reality we need to make sure that we have an adequate income in retirement. It helps to have a savings plan for the future. A pension can help you plan for these years, whether you want to retire to the country, travel, or spend time with your grandchildren.

Your pension is the income that you can have once you stop working. A Pension Plan allows you to make regular payments and/or transfer one-off lump sums into a fund for retirement. The amounts saved into your pension are called “contributions”.

How does a pension work?

In order to make the most appropriate choice for you, you need to know how a pension works.

• Each payday, each year or as often as you like, you save some money into a retirement fund. Your fund is put away and invested. Its aim is to grow over time, so that when you finally decide to retire, you'll have savings to live out your life with a good income.

• A pension is just a way of saving for the long term. But it’s different for two reasons. One, when you save money in a pension, you'll probably get tax relief on it – so the real cost to you could be less than you might think. Two, the returns you earn on your investment are reinvested over and over, for years.

• Note that normally you cannot cash it in before age 60.  But there are circumstances where you can retire as early as age 50. This would require the agreement of your insurer.

• Where you are permanently unable to work or terminally ill, you may be able to retire at any time with the approval of your insurer.

• Finally you need to know that pension payments are treated as income and taxed under the PAYE system.

How and when to start a pension?

The money you save into your pension plan is invested so that your fund can grow over time. This is why, although your retirement may seem like a long way off, the earlier you start a pension plan, the more time your retirement fund will have to grow and the bigger your pension pot will be.

The value of your pension at retirement depends on:

1. How much you can afford to put away each month.

2. The length of time you are making contributions.

3. The type of pension plan you select.

4. The investment return.

There is a wide range of pension products. With many pension options on the market, making the right choices can often be confusing and complicated.

Therefore, before starting your Pension Plan you should obtain sound financial advice from a qualified financial advisor. An independent financial advisor can guide you through the process and help you select the right plan for your circumstances.

Be aware that if your circumstances change, you may wish to alter the amount you pay into your plan or change the funds your payments are invested in.

What kind of pension do I need?

Before taking out a pension, it’s a good idea to see what type of plan would suit you. The most suitable pension plan will depend on your employment details.

The right pension option for your needs will depend on whether you are an employee, self employed, a company director/business owner or a public sector employee.

Moreover, it is important that you understand the risks involved when investing, and before you make any investment decision, you should always talk to a financial advisor about the level of risk you are prepared to accept. This should then influence the type of funds that you invest in -funds that suit your appetite for investment risk.