Saving for Retirement – There are a variety of ways to save

Saving For Retirement

So how can we avoid poverty in retirement? There are plenty of options.

Pensions, for example, are long-term investments which benefit from special tax rules that make them attractive investments for many people.

In return for not being able to take the money out until you are at least 50 – moving up to 55 by 2010 – the Government gives you tax relief (effectively a tax bonus) on the money you pay in, usually at your income tax rate, although the 2009 Budget saw plans announced to curtail this in coming years for higher rate taxpayers who would be capped to the basic rate. At the very least, however, your pension contributions will be “topped up” by a 20 per cent tax bonus, a significant boost to your pension saving. Once you start drawing your pension on retirement it will be taxed as earned income.

There are three main types of pension – occupational salary-related schemes, occupational defined-contribution or “money purchase” schemes and stakeholder/personal pensions. Each offer different options.

Occupational salary related schemes

These schemes are pensions provided by your employer based on salary and pensionable service. Also known as defined benefit schemes, the advantages include the fact that your employer will usually contribute and you will have a good idea how much your pension income will be when you retire.

Occupational defined contribution schemes

These schemes are pensions again provided by your employer but are contribution based. Your and your employer pay regularly into a pot which can eventually be used to buy an annuity from an insurance company when you retire. The amount you receive as a pension will depend on how well the fund has grown and how much it is worth when you retire and this depends a lot on the investment success of underlying investments chosen by your company pension fund.

Stakeholder and personal pensions

These pensions not necessarily linked to employment and are usually standalone and directly owned by individuals. They tend to be popular with people who have no access to an occupational scheme as well as those who are self-employed or who are not working but can afford to pay into a pension.

Pensions are not your only options for retirement planning. You may prefer to put your money into other tax-efficient investments, such as individual savings accounts (Isas), which provide you with a long term tax shelter and access to your money whenever you need it. Some people prefer to know their pension savings are “locked away” in a pension plan until they retire to avoid dipping in to these savings.

Some people invest in property, stamps and even wine to fund their retirement. But unless you are a specialist in these areas, and have taken professional advice, you may find your hobby does little to pay the bills on retirement.

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