Planning for retirement can be daunting, especially when it comes to understanding the different types of pensions available. With so many options out there, it’s easy to get lost in the details. So we’ll break it down for you. We’ll focus on the key differences between private pensions and the state pension, explaining everything you need to know about both. We’ll also discuss why you need to be thinking about a private pension despite being eligible for the state pension.
What is a State Pension?
The state pension is a regular payment you can receive from the government once you reach state pension age. You’re currently able to draw your state pension when you reach 66 years old. This is set to rise to 67 between 2026 and 2028. The amount you receive is based on your National Insurance contributions over your working life. To receive any state pension, you must have 10 qualifying years of National Insurance contributions.
To be eligible for the full state pension you must have made at least 35 years of National Insurance contributions. If your retirement planning highlights that you may not be eligible for the full state pension, you can “top up” your state pension. You can make voluntary National Insurance contributions to fill the gaps of your National Insurance record. You can check your National Insurance record on the government website.
Currently, the full state pension is £221.20 per week. However, this amount is subject to change each financial year. While it’s a helpful base income, for many it may not be enough to cover all retirement expenses.
What is a private pension?
Private pensions are savings plans that you or your employer can contribute to throughout your working life. Your contributions are usually invested, and the money you build up is used to provide an income when you retire. There are several types of private pensions, the most common being workplace pensions and personal pensions.
Since October 2012, many employees are automatically enrolled into a workplace pension. Your contributions will be made from your pay before tax, and your employer will contribute too. This allows your workplace pension to build up more quickly. You can also increase your contributions to your pension pot, maximising your savings potential.
Personal pensions are set up by you, giving control over how much you contribute and how your money is invested. You can work with a wealth management company like ourselves to invest your money in a portfolio of investments. We will ensure your money is working hard for you, whilst managing your portfolio around your retirement goals. This includes your target retirement date – we will reduce your risk as the date approaches. A benefit of investing in a personal private pension is the tax relief. You’ll automatically get a 25% boost* to your pension. This makes it a tax-efficient way to boost your retirement funds.
The amount you receive from your private pension depends on how much is in the pot. This is, in turn, determined by how much has been contributed and the performance of the your investments. Unlike the state pension, there’s no set amount you will receive. This gives you greater control over your retirement planning. You can manage your pension contributions to fund the retirement you desire.
Typically you can start withdrawing from your private pension at age 55. This is due to rise to 57 in 2028. You can withdraw up to 25% of your pension tax-free either as one single lump sum on in instalments. You can also pass on your pension funds to your beneficiaries free of inheritance tax. You can withdraw from your private pension whilst you are still working – you don’t need to wait until you retire. Remember though, the more you withdraw before you retire, the less will be in the pot for your retirement.
Why should you consider a private pension alongside your state pension?
Whilst the state pension provides a reliable base income, for most people, it won’t be sufficient in retirement. That’s where private pensions come in. They offer the flexibility, growth potential, and additional income you need to enjoy a comfortable retirement.
Ideally, a combination or private and state pensions will give you the best of both worlds. The security of a state pension teamed with the growth potential of a private pension. Here at Willday Wealth Management, we’ll work with you to understand your retirement goals. We’ll then put together a portfolio of investments to help you achieve these goals.
If you’re yet to start a private pension, don’t worry! It’s never too early, or too late, to start planning. Any additional funds available in retirement will be useful. Whether you’re just starting out in your career or you’re nearing retirement, taking action now can make all the difference.
Planning for your retirement financially is really important to ensure you can maintain your lifestyle. There’s still time to make required changes to ensure your retirement years are financially secure. This will not only give you peace of mind, but you’ll know the retirement you can start looking forward to!
Get in touch with us today to start planning for the retirement you hope for!
* You may be entitled to more or less than this amount, subject to your tax status.
With investing, your capital is at risk and you may get less than what you invested. Tax treatment depends on your individual circumstances and may change in the future.
