Pensions

What is a Pension? 

A pension is a way of saving for your retirement. You put money into your pension each month and, in return, you get a regular income once you’ve retired.

Pension contributions are tax free, which is one of the reasons saving into a pension can be more effective than saving for your retirement in other ways.

Why might I need it? 

To make sure you have enough money to live on when you are older and no longer working.

What type of pensions are available? 

Some pension schemes are available as part of your employment, other schemes you take out as an individual. These are the different types you can have:

  • Workplace (employment)

Many employers have workplace pensions you can join.  In most cases your employer makes contributions to your pension through the scheme. Sometimes you are also asked to make a contribution which is deducted directly from your wages.  Either way, if your employer contributes it is essentially free money!  When you retire you can use the sum you’ve saved up to purchase an annuity, so the exact amount you get will depend on the value of your pension pot, and the rules and annuity rates at the time.

The holy grail of pensions is something called a final salary pension scheme.  These are much less available these days, as they proved very expensive for the employer to run.  If you are offered one it is nearly always a good idea to join, as this type of scheme will guarantee an amount of pension based on the number of years you’ve worked and your salary when you leave or retire.

Due to recent changes in the law, your employer has to provide you with a basic workplace pension and make you part of it unless you tell them that you don’t want to join – this is called automatic enrolment.

  • State (employment) 

This requires you to make payments throughout your working life (via National Insurance contributions) in order for the government to pay you a salary once you reach retirement age.

You need to have over 30 ‘qualifying years’ to qualify for the full amount (see this page for details), but from April 2016 the State Pension is changing and you’ll need 35 years to get the full amount.

  • Personal (individual)

You make regular payments into your pension fund. The fund is then invested in stocks and shares with the aim of increasing the amount over the years, before your retirement. The final pot of money can be used to buy an annuity, invest in a drawdown product, taken as a lump sum, or a combination of these options – find out more.

You can’t tell in advance exactly how much pension you’ll get because it depends on how much you pay in, how well your investments do and what charges you have to pay. If your investments do badly, you could end up with less money than you expect.

  • Stakeholder (individual)

Similar to personal pensions, but they have to meet minimum standards set by the government. These include management charges not being more than 1.5% of the fund’s value for the first 10 years and 1% after that, and you must be able to start and stop payments when you want or switch providers without being charged. They also have to meet certain security standards, e.g. have independent trustees and auditors. You can start making payments into a stakeholder pension from £20 per month. (It’s possible to pay either weekly or monthly). If you don’t want to make regular payments you can pay in lump sums whenever you want.

The rules for stakeholder pensions changed in October 2012.  They are likely to be less popular in the future due to the government introducing auto-enrolment.