A pension is simply a tax-efficient, long-term savings plan. It’s a pot of money that will provide a source of income when you retire. Pensions come in all shapes and sizes. They can be as simple or as complex as you want. It is important to get some advice so that you find the right one for you, so you can enjoy a happy, secure retirement.
Most of us don’t want to work forever. Putting some of your earnings away in a personal pension right now keeps the cash coming in later on. Then, when you’re ready, you’ll be able to work less, or retire completely, and be able to afford to do the things you want to do.
So what is a pension? The basic idea is straightforward. You save up, but rather than putting your money into a bank account where it won’t get much interest, your pension savings are invested in a spread of investments – UK and overseas stock markets, property, fixed interests and bonds. The actual spread will depend on your individual attitude to risk.
What’s great about pensions is tax relief: For every £80 you invest, the government adds £20. If you’re a higher or additional rate tax payer you can make a claim for extra tax relief. That’s before you get any investment growth. Brilliant.
Just be aware though, there are limits on how much tax relief you can get each year.
The aim is that the value of your money – your investment – grows. Then, when you reach a certain age, you gradually stop putting money in and start taking it out again, to use as income. You can even take up to 25% of your value as a tax-free lump sum. Simple as that.
Every pension is different. The amount you get depends on things like the type of pension you choose, the age you start saving, how much you save and how long for, and how old you are when you take your pension.
Pensions are an investment – and all investments can go down as well as up. So it’s a good idea to have an expert review your investment funds on a regular basis to make sure you’re still on track for retiring. That said, pension products are still generally thought to be one of the safest ways of saving for retirement.
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