As a nation, we are living longer. That’s great news – but it also means we are likely to need much more money to maintain a reasonable standard of living in retirement.
The best way to prepare for retirement is therefore to start saving as early as possible so that your fund has time to grow.
Pensions can be very confusing, though. And consequently, many of us put off planning for life after work – often until it is too late.
This article explains how to ensure that you can afford a better standard of life in retirement by setting up a personal pension plan.
What is a personal pension?
Personal pensions, into which you can pay regular monthly amounts, a lump sum or a combination of the two, first became available in July 1988.
They are run by pension providers such as banks or insurance companies that invest the money on your behalf, and were originally aimed at the self-employed or those without access to an occupational pension.
This is no longer the case, though, with individuals from all walks of life using personal pensions to save for retirement.
Is a personal pension right for me?
Whether or not a personal pension is right for you depends on how much you can afford to save for retirement and what other pension arrangements you have in place already.
If, for example, your employer offers an occupational pension scheme into which it makes regular contributions in addition to your own, you will usually be better off increasing your contributions to this fund.
If not, however, the generous tax breaks offered by personal pensions makes them a popular vehicle for retirement saving.
How do I start a personal pension?
Before taking out a personal pension, it is a good idea to get some independent financial advice.
However, if you already know what you want out of your personal pension, then you can contact the pension provider of your choice directly instead.
Providers include Aegon, Scottish Widows and Standard Life.
Are there any disadvantages?
The potential disadvantages of saving into a personal pension – rather than a tax-efficient ISA, for example – include that, once your money has been paid in, you cannot access it until retirement.
Personal pensions are also less flexible than most other investment funds in that at least part of the fund must be taken as an income, which can start at any time between the ages of 55 and 75.
What about the state pension?
Most people are entitled to the Basic State Pension once they reach the State Pension Age, which depends on your date of birth but is likely to be between 65 and 68 for today's workers.
The amount you receive depends on the National Insurance Contributions (NICs) you have paid during your working life, but even the full amount is unlikely to be enough to live on comfortably in retirement.
Find out more about personal pension plans here.
Disclaimer: Where we compare financial products offered by different financial services providers or make a recommendation in relation to a particular product or provider, we do so as the providers of an information service, and this is not intended to constitute a recommendation, invitation or inducement to any particular individual to make any specific investment.