For a long time, taking your pension could not have been easier. You and your employer paid a small amount of your salary and on your retirement day you were assured to get an income. The sum you obtained was based on your final salary and the number of years you have worked. Every year that sum would increase with inflation and would keep paying out half of that income to your spouse after your death. This idea was secure and relaxing for many savers.
These days, just one in ten private-sector workers contributes into these retirement plans and their number decreases every year. With an amount of just £5,728 a year for a single person, the basic state pension is not enough to pay for the pensioner’s lifestyle.
Our increasing life expectations and the tax on dividends in pension funds leaded to the fall of the private pension schemes. The consequence is that many workers are given defined contribution pensions. Your earnings and the contribution of your employer are deposited into a pension fund managed by an insurance company. This is invested in the stock market and the resulted amount will depend on how the investments were performed, minus the charges for taking care of your money. Savers will turn this sum into an income and, to do this, they have to take out the annuity offered by insurance companies.
Nowadays, saving into a pension can be challenging. Many people hit retirement age and found out that their savings are far from satisfactory. A significant move ahead was to automatically enroll every worker into a company pension. By 2017, 11million employees will be contributing into a pension for the first time. This will assure savings for the persons who never had or waited several years to start, but still many people will hit retirement age with a much smaller income than they anticipated. It happens because savers are mainly left to their own devices and they don’t actually know how much they will need in retirement. Also, savers have to know how much has been displaced to charges, the contributions and how the pension funds have performed.
Savers hardly boost their contributions and they find out too late that they need to save more. But if you don’t begin saving until you are 45, you would have to save £935 a month to get the same income.
A big failure happens when converting the earnings into an income. Paying into a pension that will provide some kind of regular payment, a significant amount of damage can be done. Some insurers obtain enormous profits by offering duff deals to uninformed customers.
Six months before retirement, you will receive a letter from your pension company, from where you will find out that some firms will pay you much income from your savings and that you can shop around for a different income. If this letter doesn’t contain an offer of an income, the letter you receive after three months will include it. It is important for you to know that the basic income calculated by the firms will cease after your death and your spouse will be deprived of even tens of thousands of extra income. But these letters contain jargon-packed, vast information, and the most important detail goes missing. The process is baffling and the retirees are dumped on to the rate their insurer has offered.
It is critical that the pensions industry encounter some difficult reforms, but it is important for you to consult a financial adviser to help you decide what to do with your pension.