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Pension problems: four savings questions answered

Author of 'No Spend Year' answers the four pension questions she is most often asked by friends and family.

 

The pension industry is currently working on a pensions ‘dashboard’ that would allow you to see all your pension pots from different employers in one place.

How do I get my pension when I retire?

There is some confusion around how you ‘get’ your pension because at the moment we still have two types of pension schemes in operation. ‘Defined benefit’ (DB) pensions are paid as an income for life by an employer when you retire, with the amount you receive based on a percentage of your final salary multiplied by the number of years worked.

This was a good system and it meant you knew what you were going to get. But it is also very expensive to run because people are living longer.

That’s why you probably have a ‘defined contribution’ (DC) pension. When you retire, you don’t receive an income from DC pensions, you receive a pot of money and the size of that pot of money will be based on how much you contribute and how well the stockmarket does.

At the moment you can take 25% as tax-free cash – but only from age 55 – and then you have to decide what to do with the rest.

You can take it as cash but because it’s considered income, you may have to pay a load of tax on it plus you won’t have anything else to live on in later years.

If you want to make the money last you can either put it into a drawdown policy, which means investing the money and drawing down an income each year, or you can buy an annuity. Annuities are an insurance policy against living too long – you give your pot of pension money to an insurer and they offer you an income for life.

Annuities are secure but they’re out of favour because the income they generate has fallen as interest rates have slumped.

If you’re a younger saver, all these rules could change by the time you retire. It’s unlikely we’ll be able to access our pension pots at age 55, especially as we probably won’t get our state pensions until age 70!

Do I lose my pension money if I die before retiring?

If you die before retirement your money doesn’t disappear into the ether, neither does it get swallowed up by a pension company or your employer.

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