Planning for the future is something that many of us tend not to think about, especially when planning for a future that is many decades away. However, along with putting a Will in place, a pension will ensure you are financially protected once you retire. This means that you should have a clear understanding of what types of pensions are available and how to boost pension value. So, our guide is going to help you improve your understanding, helping you to make an informed decision and better choices that will give you a better future.
The Different Types of Pensions
There are three different types of available – State Pension, Defined Contribution Pensions and Defined Benefit.
This is paid to you by the government once you reach the UK state pension age. Not everyone is eligible for this, but it is determined by the amount you have paid in National Insurance Contributions.
Defined Contribution Pensions
These are also known as money purchase, and it is a common form of pension. You can open these on your own in the form of a PPP (Personal Pension Plan) or SIPP (Self Invested Personal Pension) and then pay into them with the goal of creating a pension pot that you can access when you retire. The money you pay in is invested which means that the pot can grow. This type of plan may also be set up automatically with your employment in the form of a workplace pension plan.
Every time you pay money in, it is topped up by HMRC through tax relief which makes this a very attractive and tax-efficient form of saving. Most schemes will enable you to take 25% of the pot when you reach 55 which is perfect if you want to move home, gift money to your children or even head off on the holiday of a lifetime. However, if you can leave your full pension pot to grow for the maximum time possible then this may mean a significant increase in value. (Don’t forget though, your investment value might also fall due to market conditions.)
Defined Benefit Pension
This is also known as a final salary scheme and is a workplace pension plan. These differ from other schemes as they pay out a specific amount of secure income for life when you decide to take your retirement savings. When you make payments into your pension, your employer will also pay money into the pension plan along with tax benefits from HMRC.
The amount you receive is determined by a number of factors such as your final salary, the amount of time you have been employed and your age.
How to Boost Your Pension
Use Your Pay Rise
If you are getting by on your current salary and you receive a pay rise, you can opt to pay the additional money into your pension. You don’t have to pay it all but by paying a portion, you will increase your pot.
Pay More When Your Outgoings Reduce
If you have finished paying off a loan or credit card then you can switch those payments into your pension. If it was money that you didn’t generally require each month, then you won’t notice if you begin paying it elsewhere to help provide for your future.
Pay A Lump Sum
A quick and simple way to boost your pension is to pay in a lump sum. You might have received a work bonus, inheritance or won money, whatever it might be, if you pay in an additional £1,000, you will receive an additional £250 as tax relief if you are a basic-rate payer.
If you decide to increase your contributions check whether your employer will increase the amount they pay in too.
Seek pension investment professional advice
Our circumstances change over time and the investment options we chose when we first started our pension (or accepted as a default) may no longer be the most appropriate. Again, as the value of investments may rise or fall, seek advice on the most appropriate investment funds available for you.
There are several options to choose from and you have several options available when it comes to boosting your pension. However, you should always seek professional advice when it comes to making financial decisions to ensure that you make choices that fit your circumstances.
This article is not intended to give advice or make a pension provider recommendation. You should seek financial advice from a professional advisor based on your individual circumstances.
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