Hi All,
Just to preface this to say that I do not consider myself at all financially literate! Here's my situation:
30 Years old (I have a pension carried over from previous employer to the value of c.3,000)
Salary : 60K / year
Employer will contribute up to 10% of my salary
I've been shown Standard Life Products by a broker, and to be perfectly honest, I don't have a clue what I am reading.
I was thinking about saving this instead of going the investment route.
What's your advice?
Thanks a mil
Ok, pensions 101.
A pension is a savings plan with terms and conditions.
Those
terms and conditions:
You are not taxed on the money your employer puts into your plan.
You get tax relief on the money that you put in.
The snag: You can't get the money out until you are 50 at the earliest but most can't afford to stop working then, so it will probably be 65 when you look to draw it down.
Where does your money go?
Your money is invested. The pension companies have a huge selection of options available. You can play it very safe with cash where you won't take any risk but you won't make much or you can go risky and invest in stocks and shares. They also offer property and bonds.
You can have a mixture of the lot if you want and you can always change where you are invested at any time.
It is the advisors job to help you assess what level of risk you are comfortable with by making you aware of the type of returns you can expect and show you what kind of falls there has been for the type of investment mix.
If you are not comfortable with those falls, pick something safer.
Units
Say you go with the Global Equity Fund, which is all stocks and shares from around the world.
Your money won't buy a whole lot on its own, so it is pooled with everyone else who wants to invest in the Global Equity Fund. Now, they have millions to invest and can buy lots of shares.
Instead of trying to decide who gets the Apple shares and who get BP, what happens is you buy units in the Global Equity Fund. The value of the unit is determined by how well Apple, BP and all the other shares do.
When the units go up in value, the value of your pension increases.
If the units fall, so does the value of your pension. But that's not all bad as you are buying in on a monthly basis, so if the price falls, you buy the units at a cheaper price.
Retirement
You get to retirement and you cash in the lot
You get a tax free lump sum.
With the remainder, you can buy an annuity. This is where, in return for the value of the fund, the insurance company will pay you an agreed amount for the rest of your life.
Alternatively, you can manage it yourself and take the money out as you wish, even the whole lot out in one go (there are some restrictions).
The income you get at retirement is taxed under PAYE.
If you need anything else, let me know.
Steven
www.bluewaterfp.ie