The 101 of Pensions

A pension is a type of income you get when you retire. The amount you get depends on how much you contributed to your pension fund during your working life. In simple terms, a pension scheme is just a type of savings plan to help you save money for later life. It also has favourable tax treatment compared to other forms of savings.

There are three main types of pensions, which are:

  1. State pension

  2. Employer's pension

  3. Self Invested Personal Pension (SIPP)

State Pension (After 1953)

Anyone living in the UK is eligible to receive a New State Pension if they have at least 10 qualifying years on National Insurance. However, you don’t need to have 10 qualifying years in a row. Wooo!! So as long as you were working and paid National Insurance contributions, or were getting National Insurance credits (If you were ill, Unemployed or a parent or carer) or were paying voluntary National Insurance contributions, you could claim a New State Pension.

However, If you’ve lived or worked abroad you might still be able to get some new State Pension. Check the GOV.UK website for more info on New state pensions and living abroad. 

Employers Pension

This is also known as a workplace pension. When you start working for your employer you will be automatically enrolled in your employer's pension scheme. However, you do have the option to opt out if you don’t want to pay into your employer's designated pension.

Self Invested Personal Pension (SIPP)

Self Invested Personal Pensions (SIPP) lets you plan for your retirement without the need for a workplace pension. You can open and manage a Self Invested Personal Pension without any help from an independent financial adviser or pension company representative.

Make sure you understand the risks of investing in a SIPP before you invest, or speak to an independent financial adviser to discuss your options.

Defined contribution vs defined benefit

When it comes to employer and personal pensions, there are many different types – but they generally fall into two main categories:

  • Defined contribution: this scheme allows you to build up a ‘pot’ of money. When you retire, you can withdraw from this pot to help cover your living costs. The final amount will depend on how much you and your employer have contributed. You’ll also need to take into account interest, investment gains, and any charges.

  • Defined benefit: this scheme gives you a set, guaranteed income for life once you reach the scheme’s retirement age. The amount you get is usually based on your salary and how long you’ve been on the scheme. Defined benefit pensions are becoming less common, but you’re more likely to get one from your employer if you work in the public sector.

Salary Sacrifice

Salary sacrifice is an especially tax-efficient way for you to make pension contributions. Your employer may offer a salary sacrifice as part of a pension scheme. If so, you can ‘sacrifice’ part of your salary, which your employer then pays into your pension along with their contribution. One advantage of this is that tax relief is applied automatically. Therefore you’ll notice that your contributions boost your pension more than they make a dent in your paycheck. Effectively, you're giving up disposable income now in exchange for a future pay rise (in the form of pension income). Consider this within your monthly budget!

Pension Benefits

Having a pension means having a plan for your financial future. Being prepared for retirement can have several advantages over other financial products (like savings accounts) such as;

  • Getting tax repayment on pension contributions worth up to 100% of your annual salary.

  • Pensions won’t affect your application for unemployment benefits. This is because pensions are not seen as part of your wealth while having money in a savings account usually is.

  • Pensions are protected if you go bankrupt. You may have to give up your savings if you go bankrupt, however, your pension will be protected and will remain untouched.

How much should I pay into my Pension?

The idea of retirement seems like something we should be worried about later on in life, right? Wrong. It’s important to start thinking about your financial future and what you could do now that would benefit you later in life.

Here are some things to consider when working out how much to put into your pension:

  • Retirement. The earlier you want to retire, the larger your pension should be. Essentially you'll be living off your pension for longer than a person who has retired at a later date, therefore needing a larger pension. 

  • Tax Relief. You can get tax back on your pension contributions! This can make a huge difference to your retirement fund so make sure to claim it.

  • Your employer's contributions. If you have a workplace pension, your employer's contributions can have a positive impact on your pension. Fun Fact: Some employers will often contribute more when you do - check out what your employer offers!

  • Interest and gains (if you have a defined contribution scheme). Your scheme's performance can affect your overall pension pot, so make sure you regularly check it to ensure it’s the best choice. Don’t forget about the power of compound interest - the earlier you start, the more interest you’ll earn over the lifetime of your pension.

  • Charges (if you have a defined contribution scheme). We all want to retire with a good pension pot, yet annual fees and charges can significantly reduce our savings.

5 Key Questions about Pensions to ask yourself:

  1. Have I reviewed my pensions in the past 12 months?

  2. Do I know how many pensions I have and which pension provider(s) they are with?

  3. Do I know how much I want to save and whether I’m saving enough?

  4. Do I know how much I'm paying in fees?

  5. Can I afford to make personal contributions to boost my pension? 

What you do now could have a huge impact on your future, so start today!

The following is for general information and is not intended as a form of financial advice by Finndon or it’s representatives, nor the information intended to be relied upon by individuals in making any financial decisions.