Saving for a pension allows you to take advantage of tax relief offered by the government. So for every contribution you make, (subject to a limit of £50000 in tax year 2013/2014 - This is known as the Annual Allowance) the government will add 20%. So as an example, if you were to contribute £200 per month, the government would add £40, making the total monthly contribution of £240.00. These figures are for basic rate tax payers, higher and additional rate taxpayers can claim even more tax relief.
This type of pension has been designed to have low and flexible minimum contributions, you can invest from as little as £20.00 gross per month, although the more you contribute into your pension, the better chance it will have of achieving your retirement needs. Stakeholder pensions must meet minimum standards set by the government. These include:
The funds are usually invested into stocks and shares, with the main aim being capital growth of the fund in the years up to retirement. You can usually choose from a selected range of funds to invest in, but remember the values of this type of investment may go up or down in value.
Personal pensions are similar to stakeholder, in that they are a 'Defined Contribution' pension. You will also qualify for the same tax relief on contributions, but personal pensions do not have to have the same government minimum standards. Charges are usually lower than that of a stakeholder, and have been now for many years, but this is not guaranteed to remain. The main advantage to a personal pension is a greater choice of pension funds.
The amount of income provided by your pension fund will depend on a number of things, including the amount paid into the pension fund, charges, investment returns and the annuity rates available to buy your pension income when you decide to take your benefits.
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