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Thursday, January 21, 2016

A beginners guide to retirement planning terms

Investing for your future just got a whole lot easier to understand with our simple jargon buster and top tips from the experts

  • Work out exactly what you want from your retirement before you start
  • Start saving for your retirement as early as you can for maximum returns
  • If you stay informed you are more likely to make better investment choices

Don’t let pension jargon get in the way of planning for your future. It may sound confusing and daunting, but if you are armed with the essential facts you’ll soon be on your way to finding the best investment path for you – and the earlier you start, the better your pension pot is likely to be.

However, before you start your search, you should think about what you want from your retirement, so that when you are confronted by the choices you can be decisive.

“Our top retirement term that we think people need to understand is ‘You’!” says the Pension Advisory Service’s Chief Executive Michelle Cracknell. “We have many calls where people start off by talking about the product. The starting point is to think about yourself and what you need –People first, pensions second.”

The Government’s Money Advice Service estimates that someone starting a pension at 25 years old could end up with double the fund of someone starting 20 years later. So what are you waiting for?

State pension

At £119.30 per week the basic state pension provides a good base for your retirement income, although it is unlikely to fund the kind of lifestyle that most people plan for in their later years. To top it up you will need to save into an alternative pension scheme, alongside any other investment opportunities you might have, such as property.

Be aware that if you are a woman born on or after 6 April 1953 or a man born on or after 6 April 1951 you will qualify for the new state pension, which will be £155.65 per week. Find out more at moneyadviceservice.org.uk.

Defined contribution pension

One of the most common pensions, the Defined Contribution Pension’s final value depends on how much you pay in, along with your employer’s contributions (if it is a workplace scheme) and how the investment fund has performed by the time you retire.

Defined benefit pension

Also known as a ‘final salary pension’, this scheme is often offered by large or public sector employers. It offers a secure income for the rest of your life, which is based on how long you have worked for your employer and the salary you have earned, rather than how well your investment funds have performed.

It is the responsibility of your employer to make sure there is enough money to pay your pension when the time comes for you to retire.

Annuity

If you have a pension fund, whether it is a defined benefit or defined contribution benefit, you will be able to use the money you have saved to purchase an annuity from an insurance company. The company will then give you an annual income that you will receive for the remainder of your life.

Finding the right annuity for your needs can be a challenge, but the LV= Annuities service could help. If you have 20 minutes to spare, you could also enter your details into the annuity calculator to get an idea of a rough quote.

Income drawdown

An income drawdown, like an annuity, gives you the opportunity to use the money you have saved in your pension fund. Unlike an annuity, however, the money stays in your fund and is invested elsewhere.

As investments could decrease or increase in value, income drawdowns are relatively risky. Find out what drawdown options LV= offers on the retirement options pages.


To get an idea of the best retirement option (or options) for you, ask the LV= Retirement Wizard. From this retirement hub, you can try out LV=’s retirement advice service, use the retirement income calculator or find out more about your retirement options and what they mean.

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