Why do I need a pension?
People are healthier, more active and living longer than ever before. It's quite possible you could spend 30 or 40 years retired rather than working.
For most people the State Pension, (the full new State Pension is £179.60 a week in the 2021/2022 tax year), won't be enough. A good general rule of thumb is that you need around two thirds of your final salary (including State Pension) to maintain your current living standard.
It's therefore essential for most of us to build additional pension provision through work or personally.
You receive tax relief when you contribute and your money grows tax-efficiently once inside your pension. Furthermore, if your employer makes contributions on your behalf you're, in effect, receiving free money.
Five questions to consider:
- At what age would you like to stop working? »
- Arguably, the most significant factor affecting the age you retire will be your financial circumstances. Many people picture themselves retiring in their 50s or early 60s and enjoying exotic holidays and a leisurely lifestyle, but the earlier you retire, the larger your pension fund will have to be to pay you an adequate income to fund your standard of living.
- How much income will you need when you stop working? »
- You may have built up a pension through your previous employer(s) which will provide you with an income. Whilst it's easy to take comfort in this, have you given consideration as to whether this will actually pay you the desired amount when you stop working?
It's better to find out now whilst you can still take action such as contributing more to the Your SIPP. Use the pension calculator to find out how much your pension savings could pay you at retirement.
- What do you want to do with your time when you stop working? »
- Whatever lifestyle you're planning at retirement, you will need a certain level of income to enable you to live it. Delaying pension contributions by 10 years can cut your total pension fund at retirement by more than half. It's those additional funds that will really enable you to relax and enjoy yourself when you retire.
- Why is it a tax-efficient way to save for retirement? »
You will receive tax benefits from the government to help your pension contributions go further. The money in your pension will grow free of UK capital gains tax and UK income tax.
From the age of 55 (57 from 2028) you will be able to take as much of your pension as you wish; usually up to 25% tax free and the rest taxed as income.
- Won't the government give me a pension? »
Yes. By the time you reach State Pension age (currently up to 68, depending on when you were born) you are promised a regular income from the state. However, the State Pension is only designed to help you pay for the minimum level of food, heating and clothing that you need to survive. Far less than you're likely to need.
Although the State Pension increases each year, it's still considerably lower than the average wage. In addition, State Pensions are only a promise from today's Government that any future Government will pay you this benefit. As we have an ageing population, there will be far fewer young people paying tax to fund the State Pension in the future. Do you want to rely on this Government promise?
Taking personal responsibility for your own retirement savings is far more likely to help you maintain the lifestyle you currently enjoy.
Please note: You can't normally access the money in a SIPP until at least age 55 (57 from 2028). Please remember taxation depends on your circumstances and tax rules can change over time.
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