While the UK’s public pension funds have been diminishing for some time, the decline of the private pensions market and the failure of people to effectively prepare for their retirement has caught many commentators off-guard.
To put this into perspective, some figures have hinted at a pension shortfall of £27 billion on these shores, with this representing the fiscal difference between the amount people need to save towards their pensions and the amount that they’re actually saving.
Despite the complexity of the market, a pension plan is a fundamentally simple financial product, and one that’s a large pot of cash that you and your employer can pay into and earn tax relief on. But what other perks are on offer, and how can you make the most of your pension for a more secure financial future?
The Perks of Pension Plans
You can contribute to your private or workplace pension fund right up until your retirement, at which point you’re eligible to draw money from the pot or exchange the case with an insurance company for a regular income (or annuity) until your death.
Rules introduced in 2015 also introduced greater flexibility for pension holders, as those aged 55 or older are now able to access some of their funds through withdrawals.
The age at which you can draw down on your pension is projected to rise to 57 in 2028, however, so it’s important to factor this in when planning your retirement and long-term financial management.
But what are the fundamental perks of a pension plan? Well, one of the most important is your employer’s minimum contribution, which has increased incrementally since 2018 and now sits at 3%. Together with your own minimum contribution of 5%, workers that don’t opt-out of auto-enrollment will have a cumulative 8% committed to their pension plan every single month.
What’s more, you can also gain tax relief on private pension contributions worth up to 100% of your annual earnings, with this applied automatically if you’re currently at the base, 20% rate of income tax.
Is This Compatible with Equity Release?
The concept of equity release is another popular way of funding your retirement, but some may be loath to do this in the belief that this will impact negatively on their state pension and any means-tested benefit.
However, equity release, which refers to the process of releasing capital from your home to pay off your remaining mortgage, does not affect any state pension or benefits payments (even those that may be means-tested).
The reason for this is simple; as equity release won’t see you repay the mortgage lender directly from your bank account. Instead, the funds are paid directly to the firm in question, so the capital in question does not count in any way towards your savings.
This should provide genuine peace of mind, particularly if you’ve contributed regularly to a private pension plan to and benefited from extended tax relief on your savings.
If you’re relatively young but have already begun to plan for your retirement, it’s also worth noting that the government recommends saving up to 16% of your salary from 32 years and upwards. Remember, half of this will be covered by your employer, so this is a manageable goal that will have a seismic impact on your eventual retirement fund!