Pensions are a very important part of life and you’ll most likely be relying on them once you retire. You’re told to start thinking about and putting money into a pension as soon as you start working, which may seem silly but actually; the earlier you start putting in, the more money you’ll have when you retire.
Today’s post will take an in-depth look at pensions and how they work, both before and after retirement. For more financial advice, please read our “Top 10 Finance Tips for Older People” article.
What is a Pension?
As we have already mentioned, pensions are important throughout your working life, not just once you’ve retired. The Money Saving Expert website defines a pension perfectly:
It is just a tax-free pot of cash that you, your employer (and sometimes the Government) pays into, as a way of saving up for your retirement.”
At work, you’re essentially losing disposable income each pay packet now in order to receive more of a pension bonus once you retire. The more you put in, the more you’ll get later in life.
Commonly, we all have workplace pensions throughout our working lives, before receiving a State Pension from the Government once we have retired. It will soon be illegal for a employer not to offer a workplace pension scheme, and although you don’t have to join, they are definitely worth considering.
With a workplace pension, contributions are taken directly from your wages as well as your employer’s contributions. There are two types of workplace pension schemes, which can then be divided up further:
- Final Salary Schemes – Your pension is linked to your salary whilst your working, which means it automatically increases as your pay rises. Your pensions is based on your pay at retirement and the number of years that you have been a part of the scheme. Your pension entitlement doesn’t depend on the performance of the stock market or other investments. Commonly, with this scheme you pay a set percentage of your wages towards your pension and your employer pays the rest.
- Money Purchase Schemes – The money you pay into this scheme is invested with the aim of giving you an amount of money when you retire. Your pension will be based on the amount of money you paid in, and the success of the investments. You’ll usually pay a percentage of your wages into the scheme and your employer may also pay a regular amount in but this isn’t always the case.
Occupational pensions also offer other benefits such as life insurance, which pays a lump sum to your dependents if you die whilst still employed, a pension if you have to retire early due to a long-term medical condition, and also pensions for your wife,husband, civil partner and other dependents when you die.
Group Personal Pensions
Your employer will choose the pension provider but you will then have an individual contract with said provider. You will pay contributions into your pension fund directly from your wages, with the money being used to grow your fund which you use to provide you with a pension when you retire.
The main difference between this and a personal or stakeholder pension is the amount of control you have over how the money to pay into your fund is invested. With a workplace scheme, the investment choices may be made for you by the provider.
Should you leave your current job, there are a few options available to you:
- You can leave the funds in your old employer’s scheme and access it once you reach the scheme’s pension age.
- You can transfer any funds across to your new employer’s scheme, however this is possible for all schemes. It’s best to talk to your pension provider or an independent financial adviser about the options available to you.
- You can also transfer any funds across to a personal pension.
Don’t forget to let your old pension provider know where you are if you change address later on. It’s easy to lose touch and this can make things more difficult when you retire.
How much can I put in?
Currently, the minimum contribution is 2% each month. Of this, 0.8% will come out of your take home pay and the rest in made up of your employer’s contributions and tax relief. This is due to rise to 3% in April 2019. The maximum that you can pay n a tax year for tax relief purposes is the greater of:
- A gross contribution of 3600 or:
- 100% of your earnings, subject to the annual allowance – commonly £40,000.
It may be that your employer provides you with an option of salary sacrifice as part of their pension scheme. With this scheme, you will give up part of your salary and your employer will pay this chosen amount straight into your pension. In some cases, this will mean that you pay less tax and national insurance each month.
When can I withdraw my Pension?
You can gain full access to your pension pot from the age of 55, thanks to new rules which were introduced in 2015. If you’re of poor health or suffer from a disability and have to retire early, you may be able to withdraw your pension earlier.
Once you can withdraw your funds, you have the freedom to choose how you use each of your pension pots, based on what best suits your needs. Each You need to think about this carefully however as you don’t want to spend too much, too fast. Things to consider include:
- Your long-term health and life expectancy.
- Your age.
- Your family.
- Your lifestyle.
- Your current sources of income.
- Any current or future card needs.
Different providers provide different options when it comes to withdrawing your money. Options commonly include:
- Withdrawing some or all of your pension pot as a lump sum. Please note that there may be high fees or charges each time you withdraw funds and some tax charges. Only 25% of each withdrawal (or of your lump sum) is tax-free.
- Investing part or all of your pot on the stock market. Remember that this means your income isn’t a guaranteed amount and without a maximum limit on how much you can withdraw annually, you could run out of money.
- Buying an annuity – Converting your pot into an annual pension and therefore giving you a guaranteed income for like or a specific period. Once you have decided on the income you wish to receive, you are unable to change your mind or switch provider.
The State Pension is the regular payment that you’ll receive from the Government once you have reached State Pension age (retirement age). This age will vary depending on when you were born. You can use the State Pension calculator to find out the exact date you can claim your pension.
Currently, according to Money Saving Expert, If you’re male and you were born before December 6, 1953, your official retirement age is 65. However, if you were born on or after December 6, 1953, this rises to 66 between December 2018 and April 2020. For women, if you were born before April 6, 1950, your official retirement age is 60. If you were born on or after April 6, 1950, this rises to 66 between April 2010 and April 2020.
The State Pension age is constantly under review by the Government, which means it could change multiple times in the future.
Although you might believe otherwise, your State Pension is not automated and you will need to claim it. Four months before you reach your State Pension age, you should receive a letter from the Government’s Pension Service which will tell you what you need to do.
If you haven’t received a letter three months before you reach the required age you need to call the telephone claim line on 0800 731 7898. Alternatively, you can claim your State Pension through the online service, or by downloading a form an sending it to your local pension centre.
How much will I get?
The amount of money that you receive will depend on how many “qualifying years” of national insurance contributions you have to your name. These are earned over your lifetime and the number you get will depend on how many years who have been in work.
Under the new rules which came into affect in April, 2016, you will need to have had a minimum of 10 years before you’ll get any payout at all. Reach this and you’ll be paid £46 per week, out of a maximum £159.55 available.
You’ll need to have 35 years to receive the full weekly amount. This total figure will rise each year by 2.5%, based on whichever is highest out of inflation or average wage growth.
Some people may be able to receive more than this, based on the build-up of the additional State Pension – the top up to the former basic State Pension. Although this top-up no longer exists in the new rules, he Government has allowed many workers in their 40s, 50s and early 60s to keep any of this extra cash already amassed.
Overall, as a guide to what you might get, multiply the number of years you’ve got by £4.55 – this figure is what each qualifying year is roughly worth.
Can I work after ‘Retirement’?
There is nothing stopping you from carrying on working while collection your State Pension. Any money that you earn will not affect your State Pension, however it may affect your entitlement to other benefits such as Pension Credit and Housing Benefit.
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