When you’re young, pension is something you hardly consider. You either contribute out of your wages without thinking about it, or you don’t contribute at all.
And then, suddenly, one day you get out of bed and your back twinges or you’ve got sore feet. Or the stairs are a little harder to climb than you remember. Or you find yourself moaning about ‘the youth of today’. And then you start thinking about creating (or growing) your nest egg for your golden years.
But, it might be time to start thinking about your pension well before you start getting aches and pains.
What is a pension?
A pension, in a nutshell, are a savings scheme that helps you prepare for retirement. You pay a certain amount into it every month and then – when you retire – you usually get an amount paid to you every week or month (a little bit like a salary).
Can I rely on the state pension?
Honest answer? You can, but it won’t be easy. The state pension age is currently available between 61 and 65 for women and 65 for men. To claim, you will have to have made National Insurance contributions throughout your working life. The amount you receive will depend on the number of years you have been making these contributions.
In the UK, one in seven people (that’s around 14%) that are due to retire this year have no workplace or personal pension in place. That means that they’ll be solely reliant on the state pension.
Unfortunately, it isn’t quite the nest egg that it seems. At £159.55 a week, that adds up to £8,300 a year. Not a lot, eh?
In fact, it falls short of the Joseph Rowntree Foundations minimum standard by over £1,000.
What are my options, then?
Savings (or investment)
This is like creating your own pension, without the paperwork. You put money away for the day when you retire and then you live off this chunk of money.
You can control how much you save, work out exactly how much you need to retire and invest (or save) your money in prospects or accounts with a high interest or return.
However, this isn’t without its downsides.
Firstly, there’s no limit on when you can access the money. Hit a bit of a bump in the road and it becomes very tempting to take money out of your pension savings. This could come back to haunt you in the future. Secondly, you don’t benefit from the tax relief of a pension scheme or the input of your employer.
A workplace (or employer) scheme is a way of saving for retirement that is organised and managed by your employer. The money is taken out of your wages and put straight into your retirement fund. This amount is usually matched by your employer too, doubling the amount you save every month. The government also give tax relief on this contribution.
If you’re in work at the moment, you’ll fall under the automatic enrolment, a government scheme to force all companies to offer a workplace pension to every employee. This scheme sets minimum amounts the employee, employer and government must contribute, although you and your employer can choose to contribute more.
Also, something to remember: although workplace schemes are great for the government and employer contributions, you don’t have as much control over your investments as you would savings, investments or a private pension.
If you’re unhappy with your workplace scheme, self-employed or just looking to have a few eggs in a few baskets, then private pensions are the one for you.
A personal scheme is run by a pension provider. These pension providers will claim tax relief at the basic rate and add it to your nest egg, just like a workplace pension. They don’t, however, match your contributions, which means it won’t add up as quickly. You will, however, have greater control over the level of risk with which your money is invested.
Which one is right for me?
Pensions are confusing and – let’s face it – a little boring. If you’re employed, we highly recommend sticking with your workplace scheme. Not only do you save a decent nest egg without really noticing, but you’ll benefit from your employer’s contributions too.
Are you starting to think about your pension? Do you have any questions you’d like answered? Let us know and we’ll try and take a look in our next pension blog post!