Is your pension working as hard as you are?

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Tuesday, September 07, 2021

The 13th – 17th of September is Pension Awareness Week, and with that likely comes the ‘awareness’ that many of us are unsure as to whether our pension will grow into a large enough pot for us to live comfortably off in our retirement. Below is our breakdown on pensions, which we hope will give you a clearer idea on the subject and enable you to ensure that your pension is working as hard as you are.

What is a pension?

At its most basic definition, a pension is a pot of money that both you and your employer pay into – that you get tax relief on – as a method of saving for your retirement. When you retire, you can then draw money out from your pension pot, or exchange the cash with an insurance company for a fixed income until you pass. This is called an annuity. There are no other saving products that offer the benefits that a Workplace Pension does, so it is wise to take advantage of this.

When you retire you may also qualify for a State Pension, which is a regular payment from the government. Your state pension age depends on the year you were born, and the amount depends on how many year of National Insurance payments you have contributed.

How do I get a pension?

By law, your employer has to offer a workplace pension scheme. If you’re employed and over the age of 22 earning a minimum of £10,000 per annum, you will automatically enrolled into your company’s scheme. From April 2019, the minimum employer contribution was raised to 3% of your salary. The total contribution must be at least 8%, so for example if your employer contributes 3%, you will put in 5%.

If you choose to opt out of your workplace pension and find your own, you will need to comb the market for the most suitable plan for you. Unless you are clued up on all things finance, it is best to get advice from an Independent Financial Advisor (IFA).

Five million people are now self employed and saving for a pension amongst this group is a record low – if you’re self employed don’t put it off!

How much should I be contributing?

The general rule of thumb for what you should be contributing to ensure a comfortable retirement is to take the age that you started contributing to your pension, and halve it. Then put this percentage of your pre tax salary into your pension annually until you retire. This may seem like a lot, but this does include your employers contribution, so you only need to find the remaining amount.

Basically, the simple advice is put in as much as possible, as early as possible. The sooner you contribute, the longer your money has to grow, and this can make a huge difference in the long term. Most will be unable to add enough at the beginning, but the important thing is to make a start. Use the “pay rise trick”; begin with whatever you can but every time you get a pay rise, contribute a quarter of the extra monthly funds into your pension.

For a more exact method of determining how much you need to retire, use the Money Helper’s Pension Calculator.

What happens when I retire?

Apart from in some extenuating circumstances, the money must stay in your pension until you are 55. Then, you can take 25% of your pension in a tax free lump, with the intention for the other 75% providing you with an income for the rest of your life. Last year, the Government announced that in 2028 they would be raising the earliest age you could access your pension from 55 to 57, so this may affect how you plan for your retirement.

If you are approached before you are 55 about releasing money from your pension, this is a scam called pension liberation. This type of scam is so harmful that the government made cold calling about pensions illegal in 2019.

If you are looking for your next career move, check out our vacancies page to see our latest roles. Alternatively if you would like to have a conversation about your employment opportunities give our friendly recruitment team a call on 01295 262266 or contact us.

 

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