Pension Awareness Day – six questions answered!

Posted: 15 September 2018 at 8:00 am | Author: CAW Business School

Today is Pension Awareness Day! Did you know that roughly one third of adults in the UK aren’t saving at all for their retirement?*

If you’re just starting out in your career, or struggling to make ends meet day-to-day, saving for retirement is probably the last thing on your mind. Why contribute to a pension pot, when there are so many other things to pay for, or more exciting experiences you could invest in?

Put simply: You should save for the future because we all want to be able to retire one day and continue to live nicely…

…but you can’t rely on that lottery win to achieve this! If you want to maintain a comfortable lifestyle when you stop working, you need to take responsibility for your financial future sooner rather than later – and that’s where a pension comes in!

1. What is a pension?

A pension is a long-term financial investment that provides you with an income for later life or after you retire. When (and if) you do decide to stop working, you will no longer be earning a salary; but you will still have bills to pay!

2. Why do I need a pension?

You don’t have to have a pension, but you will need to save some money of your own if you want to maintain a comfortable lifestyle after retirement. A pension scheme can help you do this in a structured, affordable way.

Putting a little aside each month has its benefits…

You won’t need to rely solely on the state pension. Even if you’re eligible for the full New State Pension of £185.15 per week (correct as of August 2022, visit the government website for up to date figures), this is far below what most people say they hope to retire on!
The money you invest into a personal pension scheme qualifies for tax relief. This means as well as the money you’re putting in, some of the money that would have gone to the government as tax now goes into your pension pot instead.
When you are enrolled into a workplace pension, your employer will usually match your contributions. This means you’re essentially doubling the funding of your pension!
Your pension grows largely tax free, which can help to boost the amount you will have.
You can take 25% of your pension pot as a tax-free lump sum when you reach age 55. (Depending on your pension scheme rules).
You can do anything you like with your pension.

3. What pensions are available?

There are three types of pensions: State Pension, company/workplace pension and personal/private pension.

State pension

The State Pension is a regular payment from the government that you can get for the rest of your life once you’ve reached State Pension age.

Your state pension is funded by your National Insurance contributions (NICs), which you pay throughout your working life. If you’re not paying national insurance (for example if/when you’re claiming benefits because you’re ill or unemployed) you may be eligible for national insurance credits to help fill the gaps in your record to make sure you still qualify for the state pension.

You can calculate when you’ll reach state pension age by using the Government’s state pension calculator.

Company/workplace pension

A company or workplace pension scheme is a pension set up by your employer. You will be required to make regular pension contributions based on a percentage of your salary, which will be taken directly from your pay.

Soon all employers will be legally required to offer a pension scheme, and must “automatically enrol” eligible employees into it. As an employee, you can choose to opt out of this pension if you want to. If you choose to remain in the scheme, usually both you and your employer will pay in. You will also receive a boost to your payments from the government in the form of tax relief.

There are two types of workplace pension schemes:

Defined contribution pension: Sometimes referred to as a “money purchase” pension, this is where your pension pot is invested into stocks and shares, with the aim of growing it over time. Most company pension schemes are now defined contribution.
Defined benefit pension: Sometimes called a final salary pension scheme, this is where your employer promises to pay out a specific pension payment or lump sum based on how much you earn. Defined benefit schemes are generally less common.

Personal pension

A personal or private pension is a defined contribution pension scheme that you arrange yourself. How it usually works is that you pay regular monthly amounts to a pension provider, who will invest the money on your behalf. The money you receive will depend on how much you pay in and how the fund’s investments perform. You can still take out a personal pension even if you are paying into a workplace pension scheme. Your pension contributions also attract tax relief.

There are two types of personal pension:

A self-Invested Personal Pension (SIPP): A SIPP is a pension plan that gives you total freedom and control over the investment decisions that make up your pension fund.
Stakeholder pension: Stakeholder pensions work in a similar manner to personal pensions. The difference is that they have to meet certain government standards, which are designed to make sure they are good value.

If you’re looking to arrange a personal pension, it is worth checking that your provider is registered with the Financial Conduct Authority (FCA), or the Pensions Regulator if it’s a stakeholder pension. You should also check with your provider that your pension scheme is registered with HM Revenue and Customs (HMRC) to ensure you receive tax relief where you’re able to.

4. When can I get my pension?

You can usually access money from your personal pensions when you reach 55 (age 57 by 2028). This includes pension plans set up by your employer. You can choose to cash in your pot when you reach this age, take out chunks of money and leave the rest of your pot invested, or use your pot to buy an annuity. Accessing your pension early doesn’t mean you have to retire or stop working if you don’t want to.

The age you can receive your state pension varies depending on your gender and date of birth. You can use the government’s state pension age tool to check when you’ll reach state pension age.

5. Where does my pension money go? Is it safe?

The money you pay in towards your pension goes to a pension provider. If it’s a workplace pension your employer will select the provider. The provider will use the money to make investments, with the aim of building it up before you retire.

No savings are entirely risk free and it is no different for pensions. The value of your pension can fluctuate, however there are controls in place to minimise risks to pensions. If your employer or pension provider goes bust and they’re unable to pay your pension, you’re usually protected. You may able to get compensation from the Financial Services Compensation Scheme (FSCS).

6. How do I track down pensions I might have?

If you’ve worked for lots of different companies over the course of your career, it is worth using the government’s Pensions Tracing Service to see if you can trace pensions you may have lost. It’s estimated that there could be as many as 50 million lost pension pots by 2050 so it’s worth searching to see if one of them is yours.