Are You Making the Most out of Your Pension?
You may be many years away from retirement and havenâ€™t given your financial circumstances upon retirement much thought. It is, however, becoming increasing important in the present financial climate to plan for the future, largely due to the well reported pensions crisis that is enveloping the country.
Are Pensions Really in Crisis? The pensions crisis is primarily linked to a circumstance in which people who have retired (and are thus no longer in receipt of a salaried income) find themselves unable to maintain their preretirement lifestyles in the long-term. Or, in the worst instances, get to a point where they donâ€™t have enough money to live comfortably. This has seen rise to a number of retirees releasing equity from their homes, so as to safeguard their retirement savings and income. A problem arises in the future, however, in that there is predicted to be a marked decline in the number of homeowners as a result of the difficulty in getting on to the housing ladder in the first instance.
Indeed, a report recently noted that by 2040 over one-third of people over the age of 60 are expected to be renting private accommodation. Thus, with no home to call their own, there is no equity to call their own to release either.
Defined Benefit Pensions: The Golden Egg That Has Cracked
The housing problem aside, another key contributing factor to the pensions crisis is a massive decline in the number of employees that work for companies who offer the option of defined benefit pensions. People will probably look back on defined benefit pensions as the gold standard of pensions. The massive financial benefit to an employee of a defined benefit pension allowed a worker to pay a small percentage of his/her monthly income into a company pension pot which, after building up for over 20 years, gifted the employee a substantial lump sum upon retirement as well as a healthy annual allowance for life or check out with Accountants York. Only 19 companies currently listed on the FTSE 100 now offer defined benefit pensions. Numerous other private/public companies, along with a swathe of local councils, have all closed their defined benefit pensions schemes to new entrants as of 2016, citing challenging economic conditions.
Forcibly Deferred Retirement Thus, in the future a large number of people will not only find themselves in a situation whereby they no longer have access to defined benefit pensions, but they may also be living considerably longer and may not own their own homes. All told, this creates something of a perfect storm and it is understandable why there are so many reports about a pensions crisis and people working well into their 70s.
Making the Most of a Pension
Your state pension is guaranteed and whilst employer-backed defined benefit pensions are becoming a thing of the past that is not to say that you cannot invest wisely in a similar pension product such as a stakeholder pension.
Stakeholder Pensions Stakeholder pensions are similar in many ways to the outgoing, defined benefit pensions. Following the closure of numerous defined benefit schemes over the last few years, increasing numbers of people are opting to invest their money into stakeholder pensions, which have become the most common type of pension scheme available. Whilst defined benefit pensions were offered by employers, stakeholder pensions are predominantly offered by banks and insurance companies. These schemes may vary in their finer details from bank to bank, but they are all essentially founded on the same principle. That principle being similar to a defined benefit scheme â€“ you pay an agreed amount into your stakeholder pension plan each month, watch your pension pot grow and after several years claim your private pension.
Stakeholder Pensions: Lump Sums and Annuities
Mirroring the key benefit of defined benefit pensions and Tax Accounting York stakeholder pensions also offer the customer a substantial lump sum amount as well as an annual pension when the pension is cashed in. You may prefer to opt for a smaller lump sum and a larger annual pension, however, if you are able to take a larger lump sum of over £50,000 then it may well be worth researching placing this amount into a high-interest ISA to further increase its value. Whilst high-interest ISAs can lock your money into an account for 3 – 5 years they do offer exceptional rates of return. Providing you have enough of your lump sum and annuity remaining from a £50,000 ISA investment to help you live comfortably whilst this remaining money is placed into an ISA then this is certainly another investment option worth considering.
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