We’ve all heard of pensions but how many of us really know the ins and outs before it’s time for us to receive them? Well, here we are going to try to get a bit more insight into them and their purpose. If you’re wondering about your pension and the money that you may be contributing to it with each pay cheque, then read on to find out more.
What is a Pension?
A pension is something that you can access over a certain age, typically around the time you retire from work. It’s a tax-efficient way to provide yourself with a steady income when you’re no longer working. There are multiple different types of pensions (e.g. see this pension guide), which we are going to look at further in our next point.
Different Types of Pension
There are two main types of pension that are commonly found these days, which are as follows:
- Defined contribution pension – these could be personal plans set up by yourself or your workplace. With this, money is paid in over time. It can then be accessed when you reach retirement or a set age. The amount you get back from this when it is paid back depends on how much you put in over the years. The higher the figure you contributed, the more you will get back, as it accumulates and grows over the years.
- State pension – this is the pension that you can claim from the government when you reach the age where you are eligible. This can change in rates depending on your national insurance payments throughout your life, but generally, it’s not a lot of money to live off of, which is why it is strongly advised it isn’t something that you rely on to keep you afloat when you reach this time in your life.
The Main Purpose of Pensions
Pensions are there to provide you with security when you retire. Some plans can also give your loved ones financial protection if something should happen to you. Having a good pension set up that you pay into regularly provides you and those close to you with a more stable future.
The Ultimate Question: Are Pensions Necessary?
Unless you have large sums of money to your name when you retire, a pension is something that you need to maintain your funds and lifestyle. That being said, even if you do have a lot of money to fall back on, you don’t want that to simply just decrease. Whilst pensions aren’t exactly necessary, they are certainly something that will enhance your life in older age. They are a safety net for your lifestyle. Without a monthly income, could you happily survive?
If you haven’t currently got a pension in place, it is certainly something that you need to give serious consideration to. You need to think about your future and how you are going to be able to provide for yourself. Without a pension to support you, it may prove to be extremely difficult. So we encourage you to research more about the different options you have. When you’re no longer able to work, your pension may just be your lifeline – the sooner you get contributing, the better.