What Is The State Pension?
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
When thinking about your future, you may have heard about the State Pension. This is a regular payment from the government, which you will qualify for when you reach state retirement age, if you have paid or been credited with enough National Insurance contributions. The current maximum State Pension is £159.55 per a week.
However, you may find that this sum isn’t enough for a comfortable lifestyle in retirement. In fact, it only totals £8,296 per year. You should also keep in mind the political issues around the State Pension, with speculation over whether the government can afford such provision in the long-term future. For example, state retirement age has already been increased for a significant part of the population and this may be extended again.
That’s why it could make sense for you to invest in an Auto Enrolment Pension with your workplace. With this type of investment, you must pay in a statutory minimum (currently 1%) of your salary. In addition to this, you’ll benefit from an equivalent statutory contribution of 1% of your monthly salary from your employer, and the government will add tax relief to your own contribution. The minimum 1% contribution level is due to increase to 3% in April 2018.
Your investment then has the potential to become worth even more over time, depending on the fund and level of risk you apply to the investment. Your Pension could provide you with a retirement income that is in line with the lifestyle you are used to. Think about how much you’ll miss the salary you are on now, and the potential expense of living when you finish work. How much money do you think you’ll need in retirement and how expensive do you envisage your lifestyle?
Another option, if you are not eligible for a workplace pension, is your own Personal Pension. This is a tax-efficient way to invest for your retirement. Like an ISA, you won’t pay tax on any growth or capital gains from your investments. You’ll get tax relief on any personal contributions you make, meaning the government effectively tops up your own payments. For example, you could put in £16 per a month, you receive tax relief of £4, and your employer contributes £20 per month, so you get a total payment of £40 for a contribution of £16.
You then have flexibility on how you take the proceeds of your pension from age 55 onwards.
Think carefully and set yourself a goal for your retirement fund. You can then use this figure to work out how much money you need to put aside, and for how long.
