Financial options for retirement
If you are in your fifties or sixties, you may be starting to think seriously about your finance options as you get close to retiring. Planning for retirement isn’t always one of the easiest things to do, with many feeling stressed out trying to decide what is the best way to fund a comfortable lifestyle in their later years. Here at Guarantor Loans we take look at the different options available to you when you stop work.
When can take I take money from my pension?
Currently, in the UK, it is possible to start taking money out of a defined benefit or defined contribution scheme from the age of 55 (which is a little earlier than the average age people retire in the UK, at 58).
The aforementioned pensions fall under workplace pensions schemes (alongside cash balance plans). These are set up by employers with the intention of providing employees with benefits when they decide to retire. In summary, the three are defined as follows:
Defined benefit pension scheme: this is when you receive money based on the length of time you have worked at a company as well as receiving a pension based on your earnings there. The definition of ‘earnings’ changes between companies, so it may not necessarily include things such as bonuses, benefits, commission or overtime.
Defined contribution pension schemes: this is when contributions are invested in a number of investments. This may be done by you as well as your employer, and you are given the option of deciding how these are invested. The amount will depend on how well these investment options have done during this period of time.
Cash balance plans: these are also commonly known as being hybrid schemes, which means that they have aspects that are both defined contribution pension schemes as well as defined benefit.
Many people use a state pension as a supplementary form of funding when they entire retirement. To get a basic state pension in the UK you will need to meet certain eligibility criteria to receive it such as:
- You must be working in the UK and have reached state pension age. In November 2018, the minimum age to receive the state pension will reach 65 for both men and women. In 2020 this will rise again to 66, and to 67 in 2028, in line with the increase in life expectancy of people
- You will need to have made National Insurance contributions for at least 35 years
- If you aren’t working, you will need to pay voluntary National Insurance
You should remember that the maximum that you could possibly get for a state pension in the UK will only be up to £8,546.20. This is way below the average that it is expected a retired person will need each year to maintain their old lifestyle and live comfortably in later years, estimated to be anywhere between £23,000 and £27,000 each year. Therefore, it is generally recommended that you do not exclusively rely on a state pension when you retire.
SIPP pension schemes provided by companies like interest.me give people much greater autonomy and flexibility when it comes to their investments. As a self-invested personal pension, you get to choose what investments are made (so it is not a pooled fund), and gives you the opportunity to manage your own funds, or designator an investment manager who can look after your account if you so wish. If you choose to open a SIPP account there is a large number of assets you can decide to invest in. Whilst the list below is not an exhaustive list and will depend on the company you decide to open a SIPP fund with, it can include any of the following:
- Offshore funds
- Government securities
- Unit trusts
- Insurance company dunsa
- Investment trust that are recognised by the FCA ( Financial Conduct Authority)
- Traded endowment policies
- Individual stocks and shares
- Commercial property (e.g. factory premises, shops and offices)
Who are SIPPS suitable for?
SIPPs won’t be the best option for everyone looking to prepare themselves for financially for retirement, but it can suitable for those who:
- Still want to have money invested in retirement
- Would like the option of being able to consolidate all their pensions
- Have experience of investing
- Have a larger amount of savings and know that you will be making significant pension contributions
- Are willing to accept the level of risk and volatility that is involved in having a SIPP account, as this could mean you may end up losing money if you make the wrong investment