Pensions

What it means for you
What the state provides
Different types of pension
Reviewing your plans
Annuities

Whatever your circumstances, the chances are you will need to make extra pension savings in order to have a comfortable retirement. You need to make sure you understand your options in order to pick the type of retirement plan that bests suits your personal circumstances. With any investment there is a level of risk, so you need to understand the risks involved and how best to manage them. For example, if your pension is investing in shares, you might opt to take a larger degree of risk in the early years of retirement planning, whilst building up a pension fund, and then opt for a lower level of risk as you come closer to cashing in your plan. Whatever you decide, you need to understand all the risks involved and seek financial advice where necessary.

What it means for you

Everyone needs to plan for retirement. We are living longer and healthier lives, which makes it all the more important to think about how and when to save for retirement. Retirement can last for 20 or 30 years, maybe even longer. The basic State Pension can be thought of as a start, but it may not be enough to give you the standard of living you want or need, which is why it is very important to think ahead.

What the state provides

The basic State Pension in 2005/06 is £82.05 (single) and £131.20 (couple) and you will need to have paid a consistent level of National Insurance Contributions (NICs) to qualify for the whole amount. According to your individual circumstances the state could also provide you with an additional state pension and pension credit. Visit the Financial Services Authority's (FSA) site to find out more about what the state will provide.

Different types of pensions

There are three main types of pensions:

Occupational salary-related schemes are where employers set up a scheme to provide pensions for their employees based on salary and pensionable service. Occupational money purchase schemes are where employers build up a personal pension fund that you convert into an income when you retire. The employer will usually contribute to the scheme. Finally, stakeholder and personal pension schemes are also money purchase schemes and are the most popular choice for people who arrange their pensions privately (although some employers do offer them to their employees).

To find out more about the differences between the various types of pensions, you can visit the Financial Services Authority's guide to pensions.

Reviewing your plans

It is important to remember that planning for your retirement is not a one-off job. You will need to review your plan regularly to make sure you are setting enough money aside and that you are saving in the best way. You will also need to review your plans and consider your options if your circumstances change, particularly if you leave a job where you have an occupation pension scheme.

Annuities

An annuity is a special type of investment that will pay you an income for the rest of your life, however long you live. Buying an annuity usually means exchanging your pension fund for this form of lifetime income.

Insurance companies sell annuities and they adjust their rates according to factors such as the rising average life expectancy. It is important to note that interest rates will affect annuity rates, and therefore the conditions under which you buy your annunity will affect how much income you get.