HOW MUCH PENSION WILL I GET?
A question asked by a lot of people.
The short answer is…… it depends, I know that’s vague, but it really does depend on a few factors
I can tell you the basics so you can figure out where to go from here.
Only you can help with this one, each person’s life is unique and so is their pension forecast. A financial advisor can help you but they want a cut of your hard earned cash in return, try and grasp the basics before funding someone else’s 3rd holiday home or yacht.
WHY SHOULD I BE INTERESTED IN PENSIONS?
FREE MONEY, please take a minute to take that in.
FREE FREE FREE, all there for the taking.
WHAT ARE PENSIONS?
Traditionally a pension is a separate pot of money, invested over the years and in later life gives you an income when you are no longer working for a paycheck.
Pension income can come from the government, your employer scheme, you, or a mix of all three.
There are other ways to generate an income in retirement, I will mention them at the end of this post.
THREE TYPES OF PENSION
Have a read and decide what is best for you:
Workplace or Company Pension
Private Pension (SIPP)
In the UK this is paid to people over a certain age, in 2018 it is £165 per week per person.
The government pays State Pension with money they gather from all the working people paying National Insurance.
To get a State Pension you need 35 years of paying National Insurance, or equivalent credits if you were unemployed, a carer or caring for a child.
More Details from GOV https://www.gov.uk/state-pension
Workplace or Company Pension
This is an employer scheme, and they are unbelievable.
You generally pay some money from your salary each month.
Next the magic happens, your employer pays in (FREE MONEY).
HMRC pays the tax you would have otherwise paid them (FREE MONEY).
Compound Interest accumulates tax free (FREE MONEY & FREE MONEY).
A private pension is just that, something you arrange outside of work / the government’s state pension.
You will still get the HMRC tax back & tax free compound interest.
Some people can arrange to have their employer contribute and a lot of self employed people use these too.
You can open one at any age, financially savvy people even open these for their children as babies, but that is going off topic, will save this for another time.
Yes, you read right, you can literally make money while you sleep. My work pension grows every day, even if I stopped working tomorrow my funds will continue to grow over the years until I reach 55 or the agreed pension age.
The money in my pension pot is invested in Equities & Bonds through a Pension Provider in a Fund. The fund consists of:
- Equities or shares, this is a small share of businesses on the stock market, EG Facebook, Amazon, Tesco etc. They increase in value over long periods of time and some pay dividends to their owners (aka your pension fund)
- Bonds are loans to businesses and governments in return for coupons. A bond is like a mortgage but in reverse, the company / government pay you interest over time and at the end they pay you (aka your pension fund) back the original amount you lent them.
There are LOTS of variable factors, but you should have a basic understanding of what your pension fund options are. So if you have any sort of pension pot you probably own a small part of the big brands you know and love, and you didn’t even realize.
Take the free cash, all of it!!
Nowhere in life you will get money thrown at you from HMRC (tax breaks), growth (your money earning money) and your employer (now a legal requirement for most).
So you are thinking, how much pension will I get?
The answer depends on which of the options you go for throughout your life.
The sad fact is lots of people don’t know where or when to start saving, how much to save and how to plan this long term.
One of the most important factors is starting as early in life as you can.
ALTERNATIVES TO PENSIONS
Not everyone pays into a pension for their retirement plan, remember I said personal finance is unique.
Here are just a few alternatives I can think of; buy to let houses, ISAs (Stock & Share, Cash, Lifetime), general savings, downsizing their house, selling their business etc.
You might want to consider these, or use a combination of options in addition to the pensions mentioned above.
Final Salary Pensions
Final Salary Pensions are the holy grail of retirement and quite rare these days.
In the past you worked for 40 years earning a bit more each year, then at the end your pension trust paid you say 60% of your final salary until you died.
A lot of funds found it difficult to keep up with paying these large sums each year, hence all the bad press.
Final Salary Pensions still exist and maybe an option for you, if so you have hit the jackpot.
I am paying into my workplace pension, I have a stocks & shares ISA, small savings amount and aim to have our mortgage paid off well before we get to retirement age, as well as whatever will be available as a state pension.
I’m not sure exactly how much pension I will get, but I’m not worried.
The only bad retirement plan is one that doesn’t exist, how will you fund yours?
Some points to note, no-one can predict exactly how much your pensions will grow over the years and the State Pension is not 100% guaranteed to stay as it is just now.
By the time I get to retirement there will not likely be as many workers paying into the NI scheme, this is something that has been forecast for many years, people are having less children to support the ageing population.
Please don’t be put off there are lots of small steps you can take to make sure you aren’t burning the furniture to keep warm in your 70’s and 80’s.
So what about your pension? It depends how much you put in over the years, how much that grows, what shape the state pension is in at that time.
I presume you really want to know if you can still live a decent life, trust me a small amount grows over time into something special.
The answer for your 70 year old self will depend on how much you did now to make sure you will be looked after, the free money is there and now you know where to look for it.
The sooner you start the better, even if it is just £20 a month that can still grow.
Make the change today.
YOU CAN DO IT, TRUST ME
I know its a lot to take in but if you’ve read this article you are already switched on to helping yourself.
If you put into practice a small amount of savings you are in a better place than before and will be so grateful when retirement day comes.
Skip a few rounds of drinks, make lunch a few days a week, drop a few lattes in the week or have friends over for dinner instead of the fancy restaurant, I will add recipes for you here on http://eatsavelive.com/category/recipes/.
If you have debt problems you will need some space to work through that. In My Debt Story (http://eatsavelive.com/my-debt-story/) I explained how it took 11 years to finally escape consumer debt and I’m still in mortgage and student loan debt. I’m in a better place now I have worked through those issues.
Once your money is in order lots of worries can melt away, I hope I have helped you take one step closer to financial freedom.
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