Retirement Planning Dreams

A pension plan is probably one of the most important and largest investments you can make, so it is essential that you choose the plan that best fits your personal circumstances. The earlier you start putting money into a pension, the more it will be worth in the future.

Although starting to invest in a pension early is important, choosing the right pension can also make a significant difference in how much your pension pot will be worth once you are ready to retire. Unfortunately, information about pension plans is often complex and confusing and there are many different types of pensions to choose from. Take these five factors into consideration before choosing a pension plan.

What type of pension fund does your employer offer?

If you work for an employer who still offers a defined benefit pension scheme, this is the best pension option out there. In these plans, the employer matches, or in some cases exceeds, your contributions, assumes all of the investment risk, and provides you with a guaranteed income at retirement, which is a fixed proportion of your final salary.

More commonly these days, companies are offering defined contribution plans that are funded by fixed contributions from both the employee and the employer. The amount of pension income you will receive will depend on how well the fund has been managed, the annuity rates, and the size of your pension pot at the time you retire.

How much will be able to save during your working life?

Figuring out what your earning potential is and how much you will be able to save will help you determine the type of pension that will safeguard your retirement income in the future. A stakeholder pension is an inexpensive option for anyone who is self employed. There are no penalties and management fees are capped at one-and-a-half percent a year.

How old are you?

Your age will affect your pension decisions in a number of ways. The earlier you start to contribute to a pension plan the less you have to contribute on an annual basis in order to achieve the income level you need for retirement. If you start in your early twenties, investing ten to fifteen percent of your income is adequate, but if you wait until you are forty you will need to invest twenty-five to thirty-five percent. Age also influences how much risk you should assume. As you approach retirement age the focus changes from growing your pension assets to protecting the ones you have already accumulated.

How flexible is the pension plan?

Pension plans vary greatly in terms of whether you will be allowed to transfer your pension, suspend contributions for a period of time, reduce the amount of your contributions, take a pension release, or retire early without having to pay penalties. Often plans that are more flexible charge higher management fees and commissions. Shop around for the best terms and make sure you read the fine print.

What is your attitude towards investment risk?

You need to assess your level of tolerance for risk. Pension plans invest your money in various assets. If you have a low tolerance for risk you need to choose a pension plan that invests conservatively. Those with a much higher tolerance for risk may choose plans that invest in the equity market or allow investors to choose their investments.

Above all else, practice due diligence when choosing a pension plan. Purchasing a pension plan on impulse without careful prior consideration is something you will likely live to regret.

Filed under: Plans on August 19th, 2011