Pensions. We’ve all heard of them, but do we really pay attention to everything we need to know about pensions? For many, sorting out pensions just isn’t a priority. We’re all far too young to worry about saving for later life, right?
Wrong! As with all money-saving, the earlier you get your pension under control, the more reward you’ll see in the long run. So, let’s get stuck in.
1. What Is A Pension?
A pension is a sum of money that is saved for later life. Every month you should be setting aside a small portion of your income, so you can support yourself when it’s finally time to retire.
You should think of your pension as a long-term savings plan. There are three types of UK pensions.
First, there is the state pension.
State pensions are paid by the government and are a secure income for later life. Most people will be eligible for state pensions. For the current tax year 2020-2021, the amount you can receive on the state pension is £175.20 a week.
You can increase the amount you receive through the state pension by working beyond the state pension age, or by making voluntary National Insurance contributions each month from your working salary.
Next, you have the workplace pension.
This type of pension is organised by your employer and is now compulsory. If you’re over the age of 22, your workplace must set up a pension scheme for you – whether that’s through a government scheme, their own scheme, or through a pension provider.
You must add a minimum of 5% to your workplace pension. You can choose to add more than 5% if you wish. Your employer must then contribute 3% of your earnings (the minimum amount required for a workplace pension)
Your pension provider will claim tax relief from the amount added, and this will be added to your pension pot. At the moment, for every £80 that you add, the government will add £20.
Then you have the personal pension.
This type of pension is entirely driven by you – you will have to set it up yourself. You can have a personal pension alongside a workplace pension, which for many is a great way to increase the amount in their pension pot.
With personal pensions you can either set up regular payments, or you can make one-off payments. The money you add into your pension fund is then invested across different assets.
The amount you ultimately receive from a personal pension will depend on a few factors. The level of charges you pay, how well your investments have performed, and how much you and your employer have paid into the scheme.
2. Why Are Pensions Important?
The most obvious benefit of pensions is that it acts as a savings pot for later in life when you are no longer able to earn a steady income through work.
Pensions are also great because the government contributes to your pot through tax relief systems – this means that some of your money that would have gone to the government as tax, goes into your pension pot instead.
Employers can also contribute, which further helps your savings grow.
3. When Can I Claim My Pension?
Both men and women can currently claim a state pension from the age of 65, however this is due to increase in future years. By 2037 the state pension age is predicted to increase to 68 years.
When you reach state pension age, you have to start claiming the funds – you do not receive the money automatically. This is because there is the option to delay taking your state pension.
You may reach the state pension age of 65, and still be perfectly happy to continue working – meaning you don’t really need to claim your pension yet.
For every nine weeks that you defer, your pension pot will increase in value by 1%. If you didn’t take your pension until you reached 66 years old, that’s an extra 6% you would receive.
However, if you have workplace, or personal pensions, you can start receiving the money at the age of 55. You can either take a lump sum payment out of your fund, choose to receive the money as a regular income, or withdraw smaller amounts on a regular basis.
4. Is The State Pension Enough To Live Off?
This is one of the most important things you need to know about pensions. The current state pension allowance is £175 a week. That’s £9,000 a year.
Although you are likely to be spending less money by the time you retire, £9,000 a year is probably not enough money to live comfortably. Therefore it is suggested that you also contribute to a workplace pension, or a personal pension well in advance of your retirement.
Starting a workplace, or personal pension from a young age is therefore advised. The sooner you start making pension contributions, the longer you’ll have to save, and the more money you’ll end up with.
If you’re not sure how much you should be paying into your pension, the basic rule is to take the age you first started paying into a pension, and then halve it. If you only started paying into a pension when you were 30, you should add 15% of your pre-tax salary into your pension each year before you retire!
5. How Can I Track Lost Pensions?
If you’ve worked in multiple jobs, it’s more than likely that you’ll have paid into a variety of workplace pensions. Keeping track of all the pension schemes you’ve paid into isn’t always easy, especially if you’re sorting it out 50 years later!
By losing track of all your different pots of money, you won’t be making the most out of your retirement savings.
One way you can find out about your old pensions is to contact all of your old employers.
If you don’t have all the details for this, you could also use the Pension Tracing Service. This is a government service that finds the details of your old pension providers.
Once you’ve found all of your schemes, you can then work on combining them into one plan. There are companies set up to help you combine your plans, including one called Pensionbee.
If you open the Emma app and click on the Save Money tab, you’ll see that we work with PensionBee to help get all your pensions in one place. Click on the section which says combine pensions and we’ll direct you straight to the PensionBee site, or you can click through here.
In no time you’ll have all your pensions under one roof.
Pensions can seem like a very distant reality, but they are one of the most important aspects of gaining greater financial control. We hope that this article has shown you everything you need to know about pensions.
However boring they may seem, make understanding your pensions a priority. Your (very) future self will definitely thank you for it!
Emma is a money management app that connects all your bank accounts to track your monthly spending and subscriptions. Emma will help you visualise and take control of your finances. Make sure you aren’t overspending, and show you practical steps to start budgeting effectively.