What is a pension? And are there any other ways of saving for retirement? If you
don't want to work until the day you die you probably want to watch this video. In
this episode we're going to cover what a pension is and how else you can save for
an early retirement. Let's check it out
Welcome to Money Unshackled, the investment channel that sets you and
your finances free. I'm Andy, this is Ben and today we're talking
pensions and if you like the video give it a like, don't forget to subscribe and
if you click the bell button you'll receive notifications every time we
release a video so you don't miss any. Let's get into it.
A pension is a pot of
money that is invested in stocks and shares or other financial assets that
pays you an income to support you financially
once you have stopped working. It is how people are able to survive after
retirement and is typically associated with old age.
Just because it's associated with old age doesn't mean young people should not be thinking
about pensions, you presumably want to retire one day and when that day comes
either you will have prepared for a time when you were young and you will be fine
or you won't have prepared, and you will live your later years in poverty.
Defined Benefit Pensions
Companies used to provide a type of pension called the
defined benefit pension otherwise known as a final salary pension. This is what
our parents and grandparents were used to. They were paid the equivalent of a
salary once they retired for the rest of their lives and they did not need to
worry about retirement when they were younger. Now these type of pensions are a
thing of the past.
Defined Contribution Pensions
The type of pension on offer by most employers today are almost all Defined
Contribution Pensions, where the amount of money that you receive in retirement
depends heavily on the amount of money that you invested into the Pension
Scheme and how well those investments perform. Most experts say to retire with
an acceptable standard of living you need to save a percentage of your income
equal to that of half of your age of when you first start. For example, if
you're aged 30 and have not started saving into a pension yet then you need
to save fifteen percent of your monthly income for the remainder of your working
life. The fifteen percent being the half of thirty.
Fifteen percent of your salary is a hell of a lot of money but it's also necessary. If you do not follow
these basic guidelines you will suffer in retirement so get thinking about it
now. But before you start to despair many employers will match your contributions
so instead of you having to find fifteen percent you could contribute 7.5 percent
and your employer, if they're a good one, will match your contribution
with a further 7.5%, bringing you to the 15% total. If your employer doesn't do
this, consider changing employer!
A Defined Contribution Pension invests primarily in stocks and shares but
here's two advantages over investing in shares directly.
Number one - Tax Benefits
When you're paying into a pension from your salary
it will either get transferred into the pension before the tax man takes his
slice or the pension provider will top it up by the basic rate of tax
Number two - Your employer may match your contributions
If you buy shares directly then you do it with your money alone. However, if you pay in to a company pension
scheme your employer may match your contributions, which means you
effectively get to buy double the number of shares for the same cost to you.
And now for the pension downsides. Any private pension can only be accessed
once you are fifty seven or ten years below the state retirement age, currently
67. The state pension which you can get regardless of whether or not you've
saved over years and which is currently worth 159 pounds a week, can only be
accessed when you are 67 years old. For those people aspiring to retire long
before the age of 57 a pension should be considered alongside more accessible
investments such as a property portfolio or a direct investment in the stock
market, perhaps through an ISA.
Alternative retirement funds
This is the point where we want to challenge your perception of what a pension really is.
You can actually create your own retirement fund out of any financial
assets. This can be any investment that pays you an income.
A common unofficial pension that people have is building up their own rental property portfolio.
Rather than paying into an official pension, you can save up to buy rental
property which pays you an income through rental payments. One disadvantage
of investing your retirement money in property is that you have to buy it with
after-tax money. You don't get the same tax advantages that you'd get from an
official pension. Also your employer is not likely to help you buy properties in
the same way that they would help you match your official pension contributions.
However the biggest advantage to having a property portfolio
as your retirement fund is the ability to
access it whenever you are ready to retire. For example, if your age 35 and believe
that you have enough rental properties to support your lifestyle then you can
retire immediately, you don't have to wait
This flexibility from investing in
property to shave years off your working life it's a breakthrough idea when
thinking about pensions and should be considered if you are years from being
57 or if you have no chance of being put onto a matched company Pension Scheme.
Still try to take advantage of those matched company pension schemes if you can
because you simply cannot beat those 100% returns when your employer doubles your money.
Question of the day - when do you want to retire and are you prepared?
Leave your answers in the comments section.
Thanks for watching. On this
channel we talk about personal finance, investing and all things money and if you want
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This is Money Unshackled. See you next time.
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