Planning an additional retirement income: a personal pension
The Self-Invested Personal Pension (SIPP)
In the UK, the basic form of pension is the State Pension. As everyone knows, contributions are made during the course of one’s working life. However, there is also the possibility of initiating additional forms of saving in order to secure more money in old age. This form of saving stems from precise social and demographic needs, such as the increase in the average age of the population and the increasing number of years during retirement. One of the most notable consequences of the changes taking place will be that more and more State Pensions will not be able to guarantee living standards after retirement age.
In order to ensure a better standard of living in old age it is possible to set up personal pension schemes. Some of them can be taken out with the employer (but be careful to distinguish it from the workplace pension scheme - see below), with some pension institutions, or can be started by participating in a pension fund. It should not be forgotten that the UK pension system also provides for the possibility of receiving an additional State Pension.
One of the greatest advantage of a personal pension lies in the tax relief one gets on contributions. Before subscribing to a pension plan, one must of course be well informed about all the conditions. For example, in many cases the withdrawal of part of the amount paid can only take place from a certain age and under certain conditions.
Anyone who subscribes to a pension product is entitled to receive a Key facts document, a document explaining the main features of the product. Careful consideration must always be given to how much and how often contributions are to be made. In addition, in the very frequent case where contributions are made to be reinvested, the degree of investment risk one is willing to take must be checked. In addition, in the (very frequent) case where contributions are made to be reinvested, the degree of risk of the investment that one is willing to take on the basis of one’s personal inclination should also be checked carefully.
Speaking of tax advantages, one cannot fail to mention the Self-Invested Personal Pension (SIPP). This is a form of saving in a range of financial products and instruments approved by Her Majesty's Revenue and Customs (HMRC). As Investopedia also reminds on its SIPPs page , these products can be ETFs, active investment funds, shares and bonds.
This type of supplementary pension is taken out during working life and enjoys significant tax advantages. This form of retirement savings is offered by banks, insurance companies and building companies. In addition to the tax aspect, the advantages of the stakeholder pension lie in the flexibility and security standards provided by the UK government.
This kind of pension is paid by both the employer (who pays a certain amount as a contribution) and the employee (through deductions from the salary). It comes in two possible forms. 1) The increasingly uncommon Final salary schemes, whose final amount corresponds to the sum of contributions paid by the employer and the employee. 2) In the case of Money purchase schemes the sum paid is reinvested in order to secure a potentially even larger amount. It should be remembered that the employer in very many cases is obliged to automatically enroll the employees into the workplace pension. Employees, however, can eventually opt out.
To learn more, you can also read:
Regular savings accounts and savings plans: how do they work?
