Everything You Need to Know About Retirement Planning

Illustration by Tang Yau Hoong via Dribbble

These days, more and more people decide to start investing in their future by opening a pension fund, which is nothing more than a particular type of account specifically designed to help people put away a consistent amount thanks to which they can live in peace when stop working.

It is indeed an option to evaluate in order to try to ensure an income for the future. Nowadays, all UK citizens have a wide choice regarding the many types of pension schemes available.

When opening a retirement fund, you will monthly deposit a specific amount in order to help you build a more stable economic future for your life after work. The government will contribute as well through tax relief. Every pension scheme currently available also comes with tax and contribution benefits.

Retirement planning is really important because it allows the account holder to wisely plan his future and to choose the best scheme according to his preferences and his work and economic situation. If you’re planning to open a new pension fund, but you don’t know where to start, keep reading.

In the following paragraphs we’ll show you the most common kinds of retirement plans available in the UK. Moreover, you can also easily and quickly calculate your pension income online with Moneyfarm pension calculator.

Everything You Need to Know About Retirement Planning
Illustration by Tang Yau Hoong via Dribbble

How do pension schemes work in the United Kingdom?

Before we take a look at the most common types of pensions available in the UK, let’s see how most schemes work. Even though every scheme has been specifically designed to meet the needs of certain categories of people, there are some rules that apply to every one of them.

For instance, the government will always contribute to your future through tax relief. Also, with any kind of pension fund you won’t be able to access your money until you reach the retirement age, which for British citizens is currently set at 55 years old for most schemes, except for the state pension which will give you access to your savings at 66.

You should also keep in mind that when putting money on these kinds of funds you’ll be investing it, giving it a chance to grow.

That means that you’ll be also putting your savings at constant risk: the amount you get will depend on the market’s fluctuations, so you should be prepared to the eventuality to get back less than what you deposited.

Why you should set your goals and ambitions

Once understood how pension schemes work, it’s time to take a look at your life and economic goals. This is a really important part of the process of choosing the right retirement plan for you.

Before opening a pension fund, you should ask yourself some very important questions, such as where will you live when you stop working, will you want to travel, will your children and family need economic support from you and more.

This is crucial to understand what kind of life you want to live when you stop working. Even though your goals and ambition might change over time, you will have all the time to figure out how to set the best plan and to grant yourself more stability in the future.

The main kinds of pension schemes available in the UK

As previously mentioned, if you’re looking for the best pension scheme for your economic situation, nowadays you can choose among many types of plans which have been designed to meet the need of as many people as possible.

Let’s have a look on the main categories of retirement plans currently available in the UK.

The workplace pension

The workplace pension, which is also called company or occupational pension, has been designed for employees. It is in fact a particular kind of scheme to which your employer will contribute too.

Every month, you and your boss will add funds to your pension in order to help you build a more stable financial future. As a matter of fact, in the UK all employers are compelled to provide their employees with a minimum amount. The government will contribute to your fund too by applying tax relief.

This particular kind of scheme is in turn divided into two sub-categories. The first one is called defined contribution pension scheme, which consists of a fund to which both you and your employers will monthly contribute.

The money you deposit will be then invested by the pension provider in order to give it a chance to grow. The amount you get will depend on the performance of the investments. For this reason, you may also receive less than what you deposited.

The second kind of workplace pension is called defined benefit pension scheme, thanks to which you will be able to access a pre-established amount – based on how many years you have worked and on how much you deposited every month – when you reach the retirement age, which for this scheme is set at 55.

The personal pension

The personal pension, which is also called private pension, is a particular kind of scheme which has been specifically designed for independent workers. It is indeed a type of plan which grants you more control over the capital you deposit and more freedom when it comes to save or invest money on your future.

Also, even though you won’t have any employer to contribute to your future, the government will still apply tax relief. Like any other type of pension, the amount you get when you reach the retirement age will depend on the performance of the investments.

The state pension

Lastly, there’s the state pension. It is a particular type of scheme which will give you free access to your savings as soon as you reach your retirement age, which for this scheme has been set at 66 years old. The amount you get will depend on how many years you’ve been working and on your contributions.

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