It’s never too soon to start thinking about your future, and that includes making sure that you have a good retirement plan. Retirement planning can be scary and intimidating, but making sure you have a good pension income lined up can help make sure that your retirement years are more pleasant.
Why do I need a pension?
Pensions help make sure that you have a good retirement income to use once you reach retirement age. While it might seem hard for a lot of people to build retirement savings, making sure you are on a good fitting pension-wise is vital. Without a good income for when you’re no longer working, it’s hard to guarantee that you’ll ever be able to retire. On the other hand, if you have a healthy pension and make enough money to cover multiple pension pots, you might even be able to retire early – which, let’s be honest, is something that most people dream of.
Why is a pension better than a savings account?
Pensions might seem a lot like savings accounts, but there are definitely benefits to having pensions. Pension savings are locked away for a lot longer. This means that you will hopefully see good investment performance, as this is usually better over a longer time. You can also get slightly different offers on pension funds compared to savings accounts. Plus, it’s important to remember that having your money locked away, with no easy way for you to access it, makes sure that you don’t accidentally spend it prematurely.
Should all my savings go into pension funds?
No, you should not put all of your savings into pension pots. There are plenty of other things in the closer future that you need to save up for as well. You should always make sure that you have a good emergency fund saved up in case of unforeseen circumstances. Most people recommend that you have three month’s worth of expenses saved up in case you lose your job, have unexpected medical bills, or have to replace an appliance or have a car repair to pay for. Remember, when looking at whether or not to save money or what kind of savings you should try to consider the opportunity cost of saving.
Are there limits to how much I can put into my pensions?
You will find that there are limits on pension funds. You should check what your annual allowance is for different pension options – both in terms of pay-ins, and the amount you can draw out per year after you retire.
What type of pensions are available?
While all your pension funds are all designed to go towards the same thing – saving for your future, when you want to retire – there are lots of different options for your future retirement. It can be hard to pick the right options for you, so it is worth researching all your options carefully to make sure that you get the best pension savings accounts that you can.
State pension
The social security system can help provide you with a mention when you retire. However, a lot of people find that this is not a huge amount.
Individaul Retirement Arrangements
Individual Retirement Agreements, or IRAs are personal pensions that are designed to encourage people to save for their retirement. You can find a lot of different pension providers for these. This means that you should find private pensions with lower fees and a better plan for how to invest your money. You should also look at the difference between standard IRAs and Roth IRAs. Both have different types of tax relief, and you should find out which is more preferential to your situation – remembering, of course, to think ahead – after all, your pension will be a major financial asset that should follow through your whole life.
Workplace pensions
A lot of people will be familiar with the 401k type of pension, which are arranged by employers or companies. Not everyone has a 401k or an alternate workplace pension. However, if you do, you should be sure to find our all the details you can about it. Usually, you can find information about workplace schemes by talking to your HR department or finances department.
Are there veteran-specific pensions?
There are some options for veterans. Some veterans qualify for retired pay, which means they have an active income after they retire. this could be a final salary pension, meaning it is based on the pay they received at the end of their working life. A final salary scheme can be very useful for people who manage to advance and get a high rate of pay. For veterans who do not manage to qualify for retired pay, there may be a veteran’s pension available. This will usually not be as high as the possible retirement pay that they could get.
Are there disability-specific pensions available?
There are not generally specific pensions available for disabled people. However, they may be able to continue claiming social security even past retirement age. Social security is one of the valuable benefits that helps support disabled people.
How do I find out if my employer has a pension scheme?
The easiest way to check what pension options your workplace has is to ask. You could talk to your Human Resources department or the finances department. Typically, your workplace pension will be handled by whoever handles payroll, paychecks, and other employee finance issues. Pension details are an important thing to ask about if you go looking for a new job. You might find some workplaces have vastly different pensions – some might offer final salary schemes, while some may be a flat rate.
Can I have more than one pension?
Yes, you can absolutely have more than a single pension. Quite a lot of people will have one pension through a workplace scheme, as well as another personal pension. You might end up with multiple workplace pensions if you work for long enough at multiple companies that offer pensions. However, you should be aware that all your pensions from workplaces will not be paid into once you leave the job, for obvious reasons. For whatever personal pension options you want to choose, you can have a mix of pensions with a managed pension pot, as well as self-invested personal pension accounts.
How many pensions can I have?
You can typically have as many pensions as you want. However, you might find that if you have too many pensions, you might struggle to pay into all of them and you could end up with a lot of pensions that do not have a great individual value – whether or not this is a problem is dependant on what you prefer. Plus, managing several pension pots can be challenging and it quires more work than only managing a single pension.
Is it better to have one pension pot or several small pension pots?
We’ve already discussed how you can have multiple pension schemes active. However, is it better to have a single pension pot, or to spread your savings in multiple pension schemes?
Benefits to having one pension
Having a single pension pot can be very hard to manage. You might find that all your different pension providers offer slightly different investment options, and you would have to carefully read through all of these to make sure that you are getting the ideal mix of investment types to get the highest investment returns. This means that having a single account can be a lot easier to manage.
Benefits to having multiple pension pots
There is always a strong case for having money in multiple different accounts as this can offer valuable benefits. Whether that’s having multiple bank accounts or multiple pensions. The biggest reason is because having multiple places to store your money means that you can be more protected in case one of those accounts goes downhill somehow. This could be either because the bank or financial institute goes bankrupt, of because the investments that hold your money could nosedive, which could lose you money. Having multiple accounts or pensions means that even if one chunk of your money is at risk the other accounts or pension pots should still be safe.
You might also be able to pick different options to make sure you get the best tax relief possible. A lot of tax relief options have limitations on how much you can have in a tax-free or tax-favourable pension scheme, which means that you might be better off with multiple pots.
Of course, having multiple pots also means you can have a pension scheme from your employer or company, as well as a personal pension pot.
Having multiple pension pots also lets you explore different options of investment for your pension funds. For example, you might want to put some of your pension funds into high-risk investments, while you might want a majority to be in low-risk investments. Let’s look into how you can change where your investment funds are, and how you can change this.
How do I control where my pension is invested?
Most financial institutes will let you have a say on where your pension funds are invested. Some will also let you choose what percentage of your retirement savings are invested in different funds.
The options are usually high and low risk investments. High risk investments usually have a better fund performance over the long term, but they usually have a higher risk of volatility in the short term. This means that if you are locking your money into your pension plans and you still have many years before you retire, you could potentially make more money by picking higher risk investment options.
Low risk investments often have a lower rate of interest, but this rate is more stable. You can usually see from past performance of these types of funds that these can be a safer option. Of course, not as safe as pensions with guaranteed annuity rates or where you will get a guaranteed income. However, this is still a safe option that you could put your funds into towards the end of your pension term, before your retirement. This is because you could potentially see your pension pots decrease in value.
Another popular option that is now being offered by financial institutions is being able to choose only ethical investment funds. This may not be available on old pensions, but a lot of banks now give this option. Ethical funds avoid investing in industries that could be unethical, such as firearms, tobacco, or gambling. Ethical funds can also focus on investing in socially responsible industries, such as electronic vehicles, recycling companies, and more. Ethical investing appeals to a lot of people for the positive ethical implications, but these investment options can leave you with a lower interest rate than you might hope. While the ethical status of firearms is often seen as negative, this industry often has impressive gains compared to more ethical options.
Should I constantly change how my pension is invested?
No, it is not advised that you constantly change how your existing pensions are invested. The idea with pensions is to make sure that you have the money invested for a long time. This helps you achieve a generally positive trend in future performance. Changing your investments as a reaction to market trends can often be a pointless gesture, as markets change rapidly. Reactionary switches like this can even be detrimental, as you could miss upward or growth trends.
My pension fund went down. What do I do?
All investments can go down at times. The idea of pension schemes is to keep the money in an investment long enough to see significant growth over time. This means that while your funds might decrease in value, it is often advisable to simply leave the funds there, especially if you have a long time until you retire. However, if you are concerned about your funds, you should talk to a professional financial advisor.
Can I access my pension early?
Yes, a lot of pensions will let you access funds earlier than your standard age when you retire. In many cases you will be able to access the funds from the age of 55, either as standard or when you start income drawdown – where you can access funds but also allow the fund to continue growing.
How do I track down lost pensions?
If you think you have old pensions that you have lost the details to, it can be hard to try to find them. You should look through any paperwork or emails you have. You may even need to contact old employers for some of your older pensions. All pensions should be linked to your ID or social security number, which might make it easier to find them. You should also make sure that any older pensions are accurate in how much they will pay out, especially final salary pensions from companies.
What is pension consolidation?
If you have multiple different pots, you might want to look at combining pensions. If you combine pensions, this might help you handle all your funds in one place. This can make managing it much simpler. Generally, pension consolidation will mean that all your funds are handled by one financial body.
Should I combine my pensions?
There are definitely upsides and downsides to pension consolidation. As we’ve already mentioned, consolidating your pensions can make it easier to manage them all. You might also be able to find a better deal or terms than some of your pots already have.
When you consolidate pensions there are other aspects to consider for management. Having multiple pots might let you put different funds into different investment types more easily, which means you can find out what investments you are happy with and what you would prefer to invest in.
If you are looking at combining pensions, you should be sure to check for exit fees. Exit fees are when you get charged for pension transfers from one financial institute to another. However, even if there are fees, you might find that there are enough benefits when you combine pensions to make it worthwhile – you have to weigh up the benefits against these fees.
There are also some types where you might not want to transfer your funds out. For example, if you have a defined benefit pension scheme that gives you a set income after you retire, you might want to transfer it into a defined contribution pension, where you would get a lump sum, or you might not want to lose the valuable guarantees that this pension type gives you. The fees for a defined contribution scheme will also be different from those on a defined contribution or defined benefit pension type, so you should consider it carefully.
Final thoughts
There’s a lot to think about when planning for your financial future. If you are concerned or confused, the best bet is to find an independent financial adviser. A financial adviser will be able to give you tailored advice for your personal situation. And remember, it’s not worth leaving any uncertainty about how you will manage your financial interests for the future. A lot of peace of mind can come from having the right funds and income for when you retire – and that way you can even aim toward retiring early.
