We all know that to retire comfortably, we need to save for the future.
A key part of this planning is organising a pension. Alongside a state pension, most people in employment in the UK will be part of the workplace pension scheme. This requires your employer to make a monthly contribution to a pension in your name.
But how many of us fully understand what a pension is, what types of pension there are, how to claim a pension or even when to start saving for retirement? Well, we’re here to hopefully answer those questions for you!
What is a pension?
We may as well start at the very beginning and confirm exactly what a pension is. Put simply, a pension is a retirement plan that will give you an income for later in life when you may no longer be earning.
The first ever pension was introduced in the UK back in 1909. The ‘old age pension’ was paid each week by the State from the age of 70 at the rate of 5 shillings (or 7 shillings and sixpence for a couple). It was means tested too so was not for everyone.
Today there are broadly three forms of pension; the state pension, workplace/company pensions and personal pensions.
The State pension is paid by the government to all eligible citizens once they reach a certain age (66 for most people retiring at the time of writing). It is paid from National Insurance contributions and is guaranteed for the rest of a person’s life. If you have 35 years of National Insurance contributions you can currently expect to receive £203.85 per week from the State pension. It is dependent on the number of years that you have been contributing to National Insurance. So the amount can be scaled back where you have not made payments for 35 years. You’ll usually need at least 10 qualifying years on your record to get any State Pension.
Workplace and company pensions usually involve both the employer and employee contributing to a scheme with the government boosting contributions through tax relief. In the UK, your employer must enrol you in a workplace pension scheme if you are aged between 22 and the current state pension age; you earn at least £10,000 a year and you usually work in the UK. Your employer must inform you when you have been enrolled in a scheme and they must let you know the date they added you, the type of pension scheme and the provider, how much you will each contribute, how to leave the scheme if you choose to and how tax relief will apply to you. For more information visit the government’s website here.
A personal pension is a pension that you have chosen to organise yourself in your own name. You are the person responsible for making payments and investing them. Once you have started saving, you can contribute to it on a regular basis or you can make one-off payments. Your pension provider will offer options to invest your money into a range of funds with the goal of making your money grow. A financial adviser can help put this in place for you to make sure that you understand exactly what you are signing up to and to make sure you are clear on what your money will be invested in. You may well have specific preferences to avoid harmful activities and support more purposeful businesses.
What types of pension are there?
There are two main types of pension; defined contribution and defined benefit.
With a defined contribution pension, as you contribute money, the fund builds. It is invested in funds that are chosen to deliver long term growth over time which leads to increased funds called a pension pot. This is the most common type of pension.
With a defined benefit pension, your employer agrees to pay you a pension income from a certain date for as long as you live based on a proportion of your salary when you retire, how long you have been part of the scheme and the scheme’s accrual rate. Your pension is based on a formula. The scheme takes the risk around the investments falling short on the promise.
How to build your pension pot
Of course, one of the simplest ways to increase your pension pot is simply to contribute more to it. If you find yourself with extra income at the end of the month, you could invest it in your pension as you may benefit from tax relief. You can also access your workplace pension to increase your monthly contributions.
Even if your pension has been set up by your employer, you can still move things around and customise it to your own preferences. Take a look at where your money is going and see if the investments match with your own personal attitude to risk and your ethical preferences.
When should you start saving for retirement?
The earlier you start saving for your retirement the better. This allows your pension pot time to grow and will allow you to hopefully have a comfortable retirement.
If you want to start planning for your future but don’t know where to begin or want some advice on when and how best to start claiming an existing pension, get in touch. We can help to answer any questions you may have to make saving for your retirement as simple a process as possible.
It is important to take professional advice before making any decision relating to your personal finances. Information within this article does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain. Ethical Futures llp is authorised and regulated by the Financial Conduct Authority.