Understanding Your Pension Options
A pension is arguably the best way to save money for when you retire, ensuring that you have a stable income even when your working days are long past. Although most of us are entitled to a state pension when the time comes, this simply isn’t enough for some people to sustain the lifestyle they’ve grown accustomed to, and that’s where the various pension options come into play. Thankfully, there are lots of different choices available to you if you want more for your retirement.
Read on to discover what’s available to you.
State Pensions from the Government
These options are available to everyone that reaches retirement age before 6th April 2016.
Basic State Pension
The basic state pension is a regular payment awarded by the government when you reach retirement age. The amount you get is determined by your National Insurance contributions and credits. As of 2015, this amount can be up to £113.10 per week.
Additional State Pension
On top of a state pension, some people are also eligible for extra funds. This amount is not fixed, and is determined by your earnings, and whether or not you’re entitled to certain benefits.
Pension on Credit
The pension on credit was created for those who are on a low income. It works by topping up your weekly total to £148.35 for single people, or £226.50 for couples. Those who have certain housing costs, are disabled, or act as carers for someone with a disability may be entitled to more.
New State Pensions
These are the options available to those who reach retirement age on or after 6th April 2016.
New State Pension
The new state pension is a regular payment that will be made to retirees, payable by the government. The specific amount that will be awarded will be determined by National Insurance contributions, but it will not be less than £148.40 per week.
Protected Payment
The protected payment is an addition to the new state pension, and eligibility will be determined by National Insurance contributions.
Pension Credit
The new pension credit will be equivalent to the current pension on credit. It will be available to people on a low income, and will be intended to top weekly income up to £148.35 for single people, and £226.50 for couples. As is the case now, carers, the severely disabled, and those with certain housing costs may be entitled to more.
Private Pensions
Private pensions are not paid by the government, but by a third party. They take one of two forms.
Workplace Pensions
Workplace pensions are pensions arranged by employers. You and your boss will both contribute towards them. They deliver a regular income and/or lump sum after retirement, which is usually significantly higher than a state pension. The funds they provide usually come either from stock market investments or a specially chosen pension provider, depending on the individual scheme your employer chooses.
Personal and Stakeholder Pensions
Like workplace pensions, personal and stakeholder pensions tend to pay significantly more than a standard government alternative. The specific amount they provide varies from person to person, as the fund they draw from has been paid into by you, and it is you who’s chosen the investments within the pension scheme. Employers can also make a contribution as part of a workplace pension scheme.
Private vs. State Pensions: Which Would Be Better for You?
State pensions are an automatic privilege, and as a result many people fail to question whether they’re the best choice for them. However, it’s worth being aware of their differences and how these could impact your retirement.
The main difference between state and private pensions is the income they provide once you retire. Considering the high cost of living, a lot of people would struggle to subsist on £113.10 per week (before any additional payments are added in). Private pensions tend to provide a much more generous income, which is a major draw for many people. It’s worth bearing in mind, of course, that this is a benefit that you pay for for most of your working life, which means that although they seem preferable, private pensions are not the right choice for everyone, especially those on a low income.
The second major difference between the two pension types is the amount of control they give you over your investments and the amount you receive. It is not simply that state pensions are less generous, but that the amount you get is set in stone. Private pensions offer more control over the way that your pension funds are raised, and thus how large an income they provide upon your retirement. Self-invested personal pensions are a particularly good example of this, as the amount each individual receives when their working days come to a close is dependent upon how the investments they’ve chosen have performed.
In truth, there is no right answer when it comes to judging whether one option is better than the other; the best pension option for you is not something that can be determined by anyone else.
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Category: Pensions
