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Legal & General Group ,
31 December 2013

 

Pensions explained.

The earlier you start saving into a pension, the better chance you’ll have of achieving your retirement goals. The State currently provides a basic level of pension income but you should also consider making your own arrangements so that you can enjoy your retirement years.

Pensions have the reputation of being confusing, but they needn’t be. Here we give a brief summary of what a pension is and why it might be a good idea for you.

Why do I need a pension?

Assuming that you don’t plan on working forever, you’ll need to replace your monthly wage with an alternative means of income when you retire.

Although it’s good news that on average people are living longer, it means the amount of money you need to fund your retirement years could be increasing, so the sooner you can start saving in a pension the better. Our cost of delay page shows how putting off starting a pension, even by a few years, can affect your retirement plans.

What is a pension?

A pension is just one way of saving for retirement. Some people choose to invest in property or shares alone, but a pension has significant tax advantages.

As well as the State pension, you can also choose to save in a company pension or a personal pension. With some company and personal pensions, you normally get to choose where your money’s invested. For our Stakeholder pension plan for example, our funds made clear page explains where you can invest your money in more detail.

So what are the advantages of saving into a pension?

Well, one significant advantage is the tax relief. To encourage people to save for their retirement, the Government offers the following:

  1. Tax relief - the taxman will add tax relief to your pension contribution at the basic rate – so for every £200 you pay, the taxman adds £50. So you get a total of £250 paid into your plan. Find out more about the tax relief available on pensions.
  2. Tax efficiency – money in your pension pot grows free from UK income tax and capital gains tax.
  3. Tax-free lump sum – when you choose to take your pension benefits, you can normally choose to take less income and have up to 25% of your pension pot as tax-free cash.

The law and tax rates may change in the future, and the value of tax relief depends on your individual circumstances.

What happens when I reach retirement age?

When you choose to take your pension benefits, you can use your pension pot to buy an 
income, sometimes referred to as an ‘annuity’. This pays you a regular income for the rest of your life. How much you'll be paid will depend on a number of factors such as the size of your fund and the annuity rates at the time. You can also provide for your registered civil partner, widow or widower, by arranging for an income to be paid to them after your death.

You can read more about our annuities on this site.

Instead of buying an annuity you may be able to take an income directly from your pension plan - this is known as ‘income drawdown’. Not all our plans offer this and, for those that do, minimum pension fund values apply. As there are a number of things you need to understand we recommend you seek advice if you are considering taking this option.


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