Information » Money » Money while you work » Pensions
A pension is a kind of a retirement plan which will give you money to live off when you retire from work.
It might seem like a long way off, but it is best to start planning for your future as soon as you can. It can take a long time to save up enough money to comfortably live off when you are older.
How much you save now could determine how long you have to work for and the quality of your life when you are older, so make the decision to get a pension sooner, rather than later.
Don’t rely on the State Pension to keep you going in retirement. The maximum basic State Pension of £113.10 (tax year 2014-15) a week is far below what most people say they hope to retire on.
Once you’ve made the decision to start saving for retirement, you need to choose how to do so. Pensions have a number of important advantages that will make your savings grow more rapidly than might otherwise be the case.
A pension is basically a long-term savings plan with tax relief - your regular contributions are invested so that they grow throughout your career and then provide you with an income in retirement. Generally you can access the money in your pension pot from the age of 55.
There are different types of pension that might be available to you:
- Basic state retirement pension - This is a flat-rate pension paid to anyone who has enough National Insurance contributions or credits when they reach state retirement age
- Workplace pension schemes - If you have access to a workplace pension scheme, then it’s likely to provide you with the most convenient route into pensions saving. Workplace pensions are particularly advantageous if your employer will contribute to the scheme. If that’s the case, then joining the workplace scheme is usually a great way to start your pension savings. Any money you put into the scheme will be topped up twice – first by your employer and second by the taxman, through tax relief. Even if your employer doesn’t currently contribute to their workplace pension scheme (employer contributions are gradually being made compulsory), there may still be advantages to joining rather than making your own pension arrangements
- Personal pension (or private pension) - You can take out a personal pension whether you are employed or self-employed from a pension company. They are intended to give you a second pension in addition to the state pension or a workplace pension. There are three types of personal pension:
- 1. Standard personal pensions, where you make regular monthly payments into a plan usually with a wide range of investment strategies chosen to suit different needs and attitudes to risk
- 2. Stakeholder pensions, which are a form of personal pension with low and flexible minimum contributions, capped charges and a default investment strategy if you don’t want too much choice
- 3. SIPPs (self-invested personal pensions), which tend to be suitable for larger contributions. They give you a large degree of control over the way your pension fund is invested, but this brings extra risks with it if you’re not an experienced investor
Deciding how you are going to save for your pension is one of the most important financial decisions you will ever make, so make sure you get independent financial advice before making a final decision and shop around for the best deal.
Under a law introduced in 2012, all employers must offer a workplace pension scheme and automatically enrol eligible workers in it. This requirement has applied to larger employers since October 2012 and by 2018 will apply to all employers.
Until now, it’s been up to workers to decide whether they want to join their employer’s pension scheme. But by 2018 all employers will have automatically enrolled their eligible workers into a workplace pension scheme unless the worker opts out. As a result, many more people will be able to build up savings to help cover their retirement needs.
Whether you work full time or part time, your employer will have to enrol you in a workplace pension scheme if you:
- are not already in a suitable workplace pension scheme
- are at least 22 years old, but under State pension age
- earn more than £10,000 a year (tax year 2014-15), and
- work in the UK
As long as you meet these criteria you’ll also be covered if you’re on a short-term contract, or an agency pays your wages, or you’re away on maternity, adoption or carers’ leave.
You can opt out of your employer’s workplace pension scheme after you’ve been enrolled. But if you do, you’ll lose out on your employer's contribution to your pension, as well as the government’s contribution in the form of tax relief. Any payments you’ve made will stay in your pension pot for retirement rather than be refunded.
The total minimum contribution is currently set at 2% of your earnings (0.8% from you, 1% from your employer, and 0.2% as tax relief). From October 2017, it will increase as follows:
- October 2017 to September 2018: 5% of your earnings (2.4% from you, 2% from your employer, and 0.6% as tax relief)
- From October 2018 onwards: 8% of your earnings (4% from you, 3% from your employer, and 1% as tax relief)
The Money Advice Service has an excellent section on pensions including
- Why save into a pension?
- Your first pension
- Protecting your State Pension when you have a baby
- Pension calculator
- Automatic enrolment
You can contact the Money Advice Service on 0300 500 5000 (or 0300 500 5555 for Welsh), Mon - Fri 8am-8pm, Sat 9am-1pm. There’s also an online chat function on their website.
You can contact Meic for free via online chat, text (84001) or phone (080880 23456).