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Pensions: what they are, why you need one and what’s available

We recently talked about pensions for the self-employed, the difficulties associated with setting money aside for sole traders and how the government is trying to help change this. This month we turn our attention to pensions in general as it’s an important long-term investment that not everyone is making the most of. Many may have more than one pension already, particularly when we have worked for more than one employer, and it’s important to manage them in order to maximise the benefits. If you don’t know where to start – either setting one up or managing ones you already have – talk to an independent financial adviser in the first instance.

In this month’s article we set out the basics about pensions, what they are, why you should have one and what your options are. And, of course, you can always get in touch with our Plutus Wealth team at www.plutuswealth.com at any time for pensions help and advice.

Why you should have a pension

A pension is an investment for your retirement. While the State Pension is available as long as you qualify, most people will say they hope to retire on more than what that offers. In 2019-2020, the State Pension pays £168.60 per week – a sum that will only go so far for those who are accustomed to living on more. Topping that up with a separate pension, whether work-related or your own personal, or stakeholder, pension, is a prudent financial decision.

The benefits of a pension

As independent financial advisers one of the questions we are often asked is, ‘Why should I invest in a pension when I could invest my money elsewhere and still access it if I need it?’ The answer is simple: tax relief. Every time you put money into your pension scheme, the amount you would otherwise pay as tax on it will instead be given back to you by the government. The catch is that it is paid into the pension pot and, as such, is invested as part of that lump sum. That tax relief is not available for any other form of saving or investment plan. Which means, that while you may have access to another type of investment, you miss out on money you would otherwise not have.

If you are employed by an organisation, your employer must offer a workplace pension and pay into it on your behalf. That applies as long as you have not opted out and are making contributions as well. There are some employers who will pay in even if you don’t, although they are few and far between. Turning down the offer of a workplace pension is like turning away free money; only do it if you have serious debts that you are paying off or really cannot afford to contribute. And as soon as you can, start to make contributions no matter how small. Remember, the employer contributions and tax relief that will apply help build up a lump sum faster than you could alone.

Are there downsides to a pension?

Since a pension is a long-term investment you are unable to access it or draw down on it until you reach the age of 55. With it being an investment, it also means that it is exposed to the vicissitudes of the market. However, the benefit of such a long-term investment is that these ups and downs are smoothed out over time. A good independent financial adviser will also work closely with you to put a strategy in place so that you transition from higher to lower risk investments the closer you get to retirement age.

Setting up a pension

Actually, setting up a pension couldn’t be easier. If you are over the age of 22 and earn more than £10,000 a year your employer must enrol you into the workplace pension. All you need to do is make regular contributions, and they will as well – in most cases it is around 3%.

If you are self-employed or wish to set up an additional stakeholder, or personal, pension, your best bet is to hire an independent financial adviser. They will scour the market on your behalf and identify the best pension plans to suit your circumstances.

We can help

Our Plutus Wealth team is made up of independent financial advisers with a wealth of expertise in pensions. Whatever stage you are at – from starting out, to approaching retirement, or looking for a mid-life review – we can help. Call us on 020 7871 5200 or email us at info@plutuswealth.com and let us help you get the most out of your retirement plans.