With press coverage mounting, it’s becoming part of our collective consciousness to put money aside for our future after we retire. Although many people know that they should be investing within a pension scheme, few actually know how they work, and the options available that will benefit them long-term.
Pensions are a vital part of our financial safety-net in later life, so it’s important that people know all of the facts and understand their financial implications. Here, we have collaborated with True Potential, a personal pension specialist to explain more about your pension.
The current climate in pensions
As a result of stagnant incomes and many workers’ inability to save, in 2015 the ONS (Office for National Statistics) demonstrated a significant rise in the number of workers who were not saving towards a pension. In 2014/15, 50% of people weren’t contributing to a pension scheme, which was 12% more than 2010/11 when figures stood at 38%. This is largely attributed to low incomes, unemployment and still being in education.
As a result of rising inflation rates, the unavailability of cash was defined as one of the factors attributed to a lack of putting money away; this was also aggravated by rising rent costs. This means that workers reprioritise their finances, and when amenities become more expensive, investing into a pension becomes less important.
In 2016, this nonchalant attitude towards pensions changed significantly. True Potential’s data suggests that workers who contributed nothing into their pension pot dropped 4% from 39% in Q2 2016 to 35% in Q3. Younger workers are also starting to contribute towards this new trend; in Q3 of 2016, the number of 24 – 34 year olds making no pension contributions fell to 19%, which fell 7% from the previous quarter marked at 26%.
It’s clear that changing attitudes towards how workers contribute towards their pension is dependent upon the education they receive. True Potential’s recent survey found that over half (57%) of 55 year olds claimed that they didn’t know how they were going to access their pension pot.
How much money will you need to start contributing?
Many people feel that they need to put away more money than they need to in order to live in financial stability when they retire. True Potential’s Savings Gap has established that workers need £23,000 annually to enjoy a comfortable retirement.
However, despite these figures, UK workers are on track to receive a mere £6,000 per year from their retirement pot. This is because a UK worker’s monthly contribution to their pension is only £325.
What can be derived from all of this is that there is a clear distinction between what we are actually able to put away, and what we should be contributing. As the survey begins to elaborate, this is because of the UK’s rising debt worries. Rather than using spare cash to put into a pension fund, workers would rather put this into savings in order to pay off any unexpected debts or charges.
If you want to be care free during your retirement, then it’s important that you invest a significant amount of money into your pension fund. You may potentially need this money for up to 20 or even 30 years. Try to consider these factors when you’re establishing how much you’ll need to receive for retirement:
- Check your outgoings — When you’re reaching the age of retirement, it’s usually the case that your outgoings are significantly lower than in previous years. . At this point in people’s lives, many people no longer need to help their children financially or have large mortgage payments to make.
- Remember your state pensions — The state pension fund will help to fill up your private pension fund. For those retiring post April 2016 under the flat rate State Pension scheme, workers will receive £7,582 per year (£151 per week). Due to these governmental changes, you may not have to put away as much as you think.
What’s important to consider is that you can only access your pension fund once you have reached the age of access. In May 2017, new age thresholds are expected to be announced and these will come into force in April 2018. For men, the current state pension age is 65, whereas for women it is between 60 and 65. In 2020 this is expected to rise to 66 for both sexes. By the late 2040s, estimations predict that these ages will rise to 69 and 70 by the early 2060s. In order to ensure that you’re properly supported, you’ll need to establish when your pension will become available in order to cover yourself financially.
Remember, all of this is dependent upon your age and is subject to when you start contributing. For example, if you start putting money aside early, then you’re going to generate a bigger sum within your pension scheme. However, if you start putting money aside in later life, then you may need to contribute a bit extra to make up for lost time.
What pensions are available?
Regardless of when you start contributing or how much you contribute, your pension is incredibly important, so it’s important that you understand the options available to you.
Personal pension
This type of scheme is where you are able to pay in amounts every month; this is then invested with the end aim of growing the initial amount over before you reach retirement. It’s up to you where and how the money is invested.
The maximum you can invest each year is £40,000, however this is dependent upon your earnings. You are able to withdraw these funds once you’re 55. Once you’ve retired you can either decide to purchase an annuity, which is a regular monthly payment paid out until you die, or you can take an income using a Drawdown scheme.
In 2015, new legislation was issued that means workers are able to withdraw 25% of their pension, tax free, dependent upon whether they wish to do this in one lump sum or spread over multiple smaller withdrawals.
Benefits of personal pensions
- You’ll receive tax relief on your personal pension contribution.
- You can invest with the aim of increasing your overall fund.
- They’re useful for self-employed people, who don’t have access to a workplace pension.
Auto-enrolment
The workplace pension is organised through your employer. The government and your employer will contribute towards this, depending on you also contributing.
The minimum that can be paid in currently is 2% of your earnings, which equates to 0.8% you pay in and 1% from your employer, and 0.2% provided as tax relief. This will increase in April 2018 to 5% of your personal earnings, which equates to 2.4% from you, 2% from your employer and 0.6% as tax relief. This will increase again in April 2019; 8% of your earnings will be used, working out as 4% from you, 3% from your employer and 1% as tax relief.
In order to be automatically enrolled into this scheme, you must be over the age of 22, should be under the state pension age, not within a current pension scheme, and earning over £8,105 a year. You can choose to opt in or out if you work on a part time basis.
By 2018, a workplace pension scheme should be available to all workers and workers should be auto-enrolled into a scheme. Alternatively, they should be given access to an equivalent scheme such as a group personal pension.
The benefits of auto-enrolment
You’ll receive tax relief from the government and receive contributions from your employer. Defined contribution pensions are a type of personal or workplace pension. The money paid in that can come from either the employer, employee or both is invested by your pension provider. The amount that is paid out is dependent on how much is paid in and how well the investment performs.
What are the defined pension benefits?
Defined pension benefits are workplace pensions. This is generally considered by what you are paid by your employer, the amount of time worked for that employer, and the general rules of your pension scheme.
Remember, when investing your money your pension fund is always at risk. Investments can always fluctuate depending on market rates, which means you may get less back than you previously invested. Tax rules can also change at any time.
