Do you have a precise picture of your current financial situation? Are you aware of how much money you are earning, what are your expenses and how much you are able to save every month? It is extremely useful to know and have an overall understanding in order to be prepared when you begin to plan your retirement. Either you are at the beginning of your career or you are getting closer to the retirement age, this information can help you make a proper strategy to plan your retirement. If you don’t know yet, UK residents have different pension alternatives available. They can be combined and with these three options may help you achieve your goal of having a steady financial situation also after you stop working. We are talking about the Workplace pension, the Self Invested Personal Pension and the State pension: let’s see how they work.
The first alternative we are checking is the Workplace pension. As soon as you sign your contract and you start working, your employer establishes specific contributions that will be taken out of your monthly salary and allocated into your pension pot. This applies for your entire career, so throughout the years the amount will grow. You do not have much control over it, since it is the company you work for that is going to decide who is going to manage the contributions. The sum will be changing based on the salary that you earn. If you move to another company or change job completely you will not lose the money allocated up to that moment, in fact you would be able to ask for a pension refund. Once you reach the retirement age you can benefit from this money accumulated over the years. However, you should consider that the whole amount you will get depends also on the performance of the investments. In order to lower the risk, when you approach the retirement age the funds will be moved into assets with a minor risk.
Self-Invested Personal Pension
If you are looking into pensions and gathering information on this topic you have come across the term SIPP. It is an acronym that refers to Self-Invested Personal Pension. It is one of the options available for UK citizens to save money for retirement. The difference between this and the one from the workplace is that you can decide who is going to manage your money and investments. You would be able to do it by yourself or pick a professional financial advisor of your choice. Having a Self-Invested Personal Pension may offer specific benefits based on the contributions you set and for how long you let your money allocated. Moreover, you can choose among several investment assets: stocks and shares, ETFs, UK government bonds, bonds issued by other countries’ governments, unit trusts, commercial properties, and others. With SIPPS you can deduct contributions up to 100% of your annual salary. For the current tax year (2022–2023), it is limited to a total amount of £40,000.
The third option available if you live in the United Kingdom is the State pension. In order to receive it, you should apply beforehand. The sum you would be getting is based on the National Insurance history and on your work. The first considers both the contributions you make when you are working and those attributed to you when you are unemployed. In case there are gaps, they can be filled with a separate contribution. The State pension will be paid to you by the government on a regular basis, as soon as you reach the retirement age and you claim it.