If you want to put your feet up and enjoy a comfortable retirement, you will need to secure a good pension plan. As COVID has led to fall in stock market certainty, it is more important than ever to know the state of your pension, and how your pension payments might be affected. From the question of what a good pension is, to the potential impact of COVID on pension changes, our guide may give you the answers you need.
How do pensions work?
If you are thinking of retiring soon, you need to have a good idea of how pensions work. A pension is a financial pot that you and your employer pay into through your workplace pension scheme, which then funds your retirement. The state pension age is 65, though you can retire at 55 if you have saved enough in your pension pot. Your pension is usually a small percentage of your salary per month, though increasing the amount of money you put in will be beneficial in the long run.
This might seem straightforward, but there are a few different kinds of pensions that you can have. The most common kind of pension is a state pension, which is financed by the government, and shaped by the national insurance contributions you make during work.
As well as the state-backed form of pension, you can also get a private pension. These are funds that you contribute your earnings to, which are usually invested into saving schemes or mutual funds. They are a defined benefit plan, which is shaped by your salary and how long you have worked for a company. The defined contribution pension, meanwhile, is based on contributions that you make from your salary and investment returns. If you want even more control over your pension, you can go for a SIPP (self-invested personal pension) that lets you base your fund on your own investments.
What is a good pension pot?
For those who are unsure about how much pension you need to retire, this will likely depend on the needs of your lifestyle. If you want to have a comfortable retirement, most advisers suggest that you try and save around 10 times your salary - so if you make £30,000, try and save £300,000. However, for a more basic retirement, a pension pot that enables you to have £12,000 a year should be sufficient.
If you want to know what a good pension pot is at 55, this will be a much bigger amount than someone retiring at 65. The average pension pot at 55 is £80,000 in the UK, so the earlier you start saving, the better. Still, remember to consider that you probably won't have to handle the costs of raising children or paying off your mortgage later in life.
Has your pension changed because of COVID?
Pensions have changed in some respects, but this largely depends on what kind of pension plan you are signed up to. For example, the uncertainty of the stock market has not led to any state pension changes. Likewise, if you have a defined benefit pension, any investment risk is handled by your employer. However, if you have a defined contribution pension, then there is a chance that your investments may have suffered some COVID-related losses, as these schemes are often invested in the stock market.
If your pension is in some way affected by stock market anxiety around coronavirus, it is crucial that you seek advice before making any rash decisions about your pension. Choosing to opt out or retire slightly too early could have a bad impact on the pension you receive. With the vaccine news bringing fresh optimism, you might also miss out on investments when the market eventually recovers. It is crucial to remember that pensions are a long-time investment, so reacting to a short-term change might be unwise. Alternatively, you may want to defer your retirement to ensure you get the best possible pension, and more income to work with.
Elsewhere, COVID has had a modest impact on pension processes. Pension providers are actively monitoring the situation, but certain functions might be slightly delayed, like responses to non-urgent queries. If you are self-isolating or are uncomfortable leaving home, you also have the option of nominating a helper to collect your state pension for you. Unfortunately, the situation has proven a breeding ground for pension scammers, so always consult either a professional or a family member before you respond to a suspicious email or phone call.