Why should I bother with a personal pension?

As the years pass by, it’s surprisingly easy to find yourself out of the loop when it comes to the world of pensions, especially if your employer takes care of it for you through a workplace scheme.

There are many options when it comes to saving for your retirement and the sooner you learn about the many benefits pensions can provide you later on down the line, the easier it gets to start taking better care of your money.

Paying into a personal pension can be a great way of securing your long-term savings, granting you both peace of mind and financial security for the future. Personal pensions are flexible, providing you with the freedom to make your own investment choices.

If you wish to find out more about how to start investing in a personal pension and why it could be the right move for you, here is a handy guide to get you started in the right direction.

Shortfalls in pensions

It is important to recognise the various risks associated with your pension savings, as this can help you better prepare for the future.

Shortfall is one such risk. Shortfall is the term used to describe a discrepancy in your pension, and this occurs when your pension income is not as much as you expected it to be. It can also be seen as the difference between how much pension you have available at retirement and what you will need as income.

It can be caused by a host of factors such as political uncertainty, stock market crashes (like the one in March 2020), underperforming assets, interest rate changes, inflation, or employers and banks going bankrupt, which results in an inability to fund pension payments.

Setting up a personal pension can offer you a great level of flexibility when it comes to avoiding shortfalls in your savings. For example, a personal pension is generally portable, which means even if you lose your job, you can continue contributing to the same scheme regardless.

A few ways to make sure that you do not experience shortfall include:

• Setting the amount for your desired annual income in retirement and then modifying your contributions to match inflation, you can use a shortfall calculator to help you with this
• Researching your options and seeking impartial advice
• Consolidating your pensions into one pot might make it easier to control and estimate your projection income in retirement
• Increasing your contributions if possible

If you feel as though you need to take more drastic measures to ensure you’ll have enough money in your pension later on in life, you might want to think about downsizing your home or selling off some of your assets. However, this is a huge step, so you should seek financial advice before opting for these choices.

Don’t panic if you feel as though you aren’t going to have enough, you can take action, and it’s better to do so as soon as possible so you have more time to save up.

Why is it important to contribute to a pension?

Why save into a pension? Because it is a good way to generate extra money via government top-ups by tax relief and possibly employer top-ups too.

Even if you do have a workplace pension scheme, contributing to your personal pension is a good way to bolster your savings for when you retire. You can use both pensions at the same time or as many pensions as you want.

You can choose to increase the amount you pay into your workplace pension too, which is worth considering if you wish to grow your pot sooner, enabling you to get more from the compounding effect. Alternatively, if you have more money to contribute to your workplace scheme, you may want to consider putting it into a personal pension scheme, which essentially grants you more control over how your savings are invested over time.

Pension contributions also qualify for tax relief, meaning that some of the money that would have gone to the government in tax goes straight into your pension savings.

The flexibility of personal pensions compared to workplace pensions

The biggest difference between these two forms of pension is that if you go private, you are the one who controls exactly how much money goes into the pot and where those funds are invested.

This flexibility is great for people with irregular incomes or those who wish to keep a closer eye on their investments.

You can also take your personal pension as soon as you’re 55, whereas a workplace pension may have a higher age limit imposed, but this is dependent on the individual scheme’s rules. For example, some defined benefit pensions will require you to reach the age of 60 or 65 before you can withdraw your savings. If you’re unsure as to whether or not this applies to you, it’s worth talking to your provider.

How we can help

At iSIPP, we provide our customers with an easily manageable self-invested personal pension. With iSIPP, you can consolidate your pension schemes into a single combined pot, allowing you to take much better control over your investment choices.

Check out our website for more details on how you can sign up.

To read more about personal pensions and how they work, visit MoneyHelper for useful impartial information.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.