A pension plan is a method of investment that will provide you with an income later on in your life once you have retired, this can make it easier to manage your finances in your later years. In addition, some pensions entitle you to a lump sum once you are eligible to receive your pension.
Pension Changes 2015
Back in 2014, Chancellor George Osbourne announced a number of changes to ‘shake up’ the current government pensions plans. The aim of the shake up is to give individuals more freedom over how they spend their pension.
Prior to April 2015, pensioners could only take out up to 25% of their pension as a tax free cash lump sum. The rest of their money would be given to them in the form of an annuity. However, the new 2015 pension changes allow individuals to control 100% of their pension meaning that those over 55 can take out any amount of money from a defined Benefits scheme. Nevertheless, it is important to mention here that still only the first 25% can be withdrawn from a pension pot tax-free.
As these new changes bring about new opportunities many pensioners may be unsure what the best option for them is. As a result the government’s Pension Wise service offers free advice to pensioners in order to help them get the most out of their pension.
Types of Pension Plans in the UK
In the UK, pension plans can be broken down into three main categories: Workplace Pensions, Personal Pensions and State Pensions.
Workplace Pensions are organized by you and your employer and, in general, both of you contribute to the pension. When eligible to begin receiving your workplace pension you will receive a reliable income which is sometimes supplemented by a lump sum of money.
Personal Pensions are a private type of pension that you only pay into and include SIPPs and Stakeholder pensions. The amount of money that you will receive upon retirement varies according to how much you paid into the scheme and how well the investment fares.
State Pensions are funded by the government and there are three subcategories: Basic State Pension, Additional State Pension and Pension Credit. Basic State Pension is a steady payment that you will begin to receive once you reach State Pension Retirement Age. The amount of money that you will receive from a Basic State Pension depends on how much N.I. (National Insurance) you have contributed to the government over your lifetime. Currently, the maximum amount of Basic State Pension is capped at £133.10 each week. Additional State Pension is an additional payment given to you in addition to your Basic State Pension and varies according to how much NI you have paid and how many benefits you have claimed. Pension Credit is awarded to those on a low income. At the moment £148.35 a week is awarded to individuals who fall under this category.
Tips for Choosing the Best Private Pension Plan for You
A private pension plan can be a great way of saving money for your future as it can provide you with a steady income and in some cases a cash lump sum. However, with so many personal pensions available it can often be difficult to work out which one is best for you. Below are some tips to help you:
- Take advantage of comparison websites. These can quickly help you work out the expenses and rewards that accompany plans from a number of providers.
- There is an element of risk associated with private pensions as the money that you pay in will be invested. So, be sure you know how the money is going to be invested and fully comprehend the level of risk that accompanies the investment.
- Work out how much you can really afford to put away as most pension plans have a minimum payment. This can be rather problematic is you are on a low income or do not receive a regular income.
- Make sure you are aware of any hidden charges such as administration fees or penalties if you decide to take your pension early.