Saving tips for 2012
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Why do we need a pension?


Why do we need a pension?

"State pension age is increasing from 60 to 65 for women and is due to increase again to 68 by 2046 and could be brought further forward and increasing to 70. Will the state pension be enough? " Warns Jane Heyman, Chartered Financial Planner from McCarthy Taylor.

"The State pension is potentially changing to £140 per week flat rate which is taxable, it is currently £102.15 per week but not all women may qualify for a full pension if they have not worked for their working life.

"Pensions offer valuable tax breaks which you cannot obtain elsewhere (such as basic rate tax relief of 20% on each contribution giving an immediate increase in value of 25%) they don’t have to be invested on the stock market and you can keep the money you have invested in a pension in a cash fund therefore benefitting from the tax benefits of a pension."
Protect yourself

A pension can also protect your from yourself if you struggle to be disciplined with money as once the money is invested you can’t take it out until you draw benefits, currently after age 55.

Get more from your employer with a pension

Employers often offer company pension schemes which they pay into as well. This is in addition to your regular pay. "If an employer offers a contribution this increases the return when compared to other savings." points out Heyman.

And you can still access your money if you leave the company by transferring your pension to another provider or canceling it if that option is available (usually this means only your own contributions are returned to you).

"The introduction of NEST (National Employment Savings Trust) means all employers will need to contribute to a pension for qualifying staff." says Heyman,

Should I take up my companies pension plan?

"If you are a lower earner, a pension may not be appropriate." Says Heyman, "But if you are a higher rate tax payer, the tax advantages are better as additional tax relief can be claimed on contributions."

The tax relief that tops up your payments by at least 25p for every £1 you put in, and more if you are a higher rate tax payer." Explains John Lawson, personal finance expert from Standard Life.

"Pensions also allow you to take a quarter of your pension pot tax free at retirement and your savings grow tax-free just like an ISA."

Heyman warns that for lower and middle incomes joining a pension might not be there immediate priority:

"For some basic rate tax payers who are disciplined enough not to touch the money using investment ISAs can be as tax effective and more flexible [than a pension]." she states.

Plus, as she goes on to point out, "cash held for the long term does not keep pace with inflation and you are therefore losing purchasing power the longer you keep it."

Lawson also warns that "as with any investments the value of your fund can go up or down and may be worth less than what was paid in."

"We all need to keep some cash," says Heyman, "It’s just how much and for how long.  And no-one can answer that!"


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Article Plan Saving tips for 2012
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