Did you know that only 28% of people feel they are on track to meet their retirement needs?
A pension can be the solution but complicated rules often put us off even getting started, meaning we miss out on the massive benefits! Let’s face it: pensions aren’t the most thrilling of subjects, but it’s important to engage with them to ensure you don’t miss out on the benefits they offer.
When it comes to being financially stable later in life, pensions are essential. So, let’s delve into what they actually are.
A savings plan to provide an income in retirement
Put simply, a pension is a long-term savings plan designed to financially prepare you for when you stop working.
During your working life, you save into a pension to build up a pot of cash for when you retire. The best part though, is that in addition to the amount you save, you benefit from a top-up from the government of at least 25% every time you contribute from your net income. So, if you pay £80 into your pension, you’ll get at least an additional £20 from the government – no strings attached! If your employer takes care of your pension you’ll normally pay in straight from gross wages which means you are saving that amount in income tax.
Read more about the tax benefits here.
There are many different pension types. The best-known is the State Pension, provided by the government.
Depending on your retirement age you will have to contribute to the National Insurance system for as many as 35 years to be eligible for the full State Pension. Even then, you’ll only get roughly £8,750 per year from it (based on the current amount). Will that really be enough to live on?
It’s unlikely that the State Pension will provide enough income for you to maintain your standard of living when you retire and there are also concerns around the funding of the State Pension. So, the government is keen for you to consider private pensions. Let’s talk about those.
There are two main types of private pensions:
Defined Benefit pensions promise you a certain income in retirement based on your years of service with your employer. However, they suffer from a similar issue as the State Pension in that they are often underfunded, meaning the employers providing them sometimes can’t live up to the promises they made.
For this reason, Defined Contribution schemes have gained in importance in recent years and are now the most popular type of pension. Under a Defined Contribution scheme, the value of your pension at retirement depends on the amount you’ve paid in (including the government contribution) and the performance of your investments.
Defined Contribution schemes are either:
Personal pensions come in various forms and are generally more flexible, however you have to do some legwork in getting them set up yourself. Once done, though, you can contribute to as many as you want regardless of whether you have a workplace pension.
A Pension Designed for the Self-Employed
Since 2012 employers are required to automatically enrol employees into a pension scheme as well as contribute to it, which means that more employed people are now benefitting from a pension.
Unfortunately, nothing similar exists for self-employed people. While the government has been trying to come up with ideas, the diversity and flexible working patterns of the self-employed has made it difficult to find a workable solution.
For these reasons, Raindrop is offering a personal pension scheme that truly suits the needs of the self-employed.
We believe the key is maintaining the basic building blocks of a traditional pension – such as long-term investments – while offering a fully digital, hassle-free and all-round flexible solution. Staying on top of your retirement savings should not be a burden.
P.S. For a more succinct overview of the key things relevant for pensions, you can also check out our Key Pension Facts guide.
How much could my pension be worth? if you have the same question, make sure to try out our Pension Calculator.