In the past, we may have ignored the importance of setting money aside towards a pension. However, with Government schemes and increased media coverage, the spotlight is firmly on our retirement savings — but just how much do you know about your pension? Here personal pension and Stocks & Shares ISA provider, True Potential Investor explains the essentials:
How much are we saving?
The amount we’re contributing to our pension is on the up. Back in 2014/15, figures from the Office for National Statistics (ONS) showed that half of UK people did not contribute to a pension — up from 28% in 2010/11.
While this growth was largely attributed to rising living costs, it seems the increasing awareness of pensions has had a positive impact. Research from True Potential Investor has shown that in 2016, the number of people putting nothing towards their pension dropped, down from 39% in Q2 2016 to 35% in Q3.
Despite awareness being on the rise, pension education seems to be an emerging issue. The same survey found that more than half of over 55s (57%) hadn’t decided on how they will access their pension.
How much should we be putting aside?
True Potential Investor’s Savings Gap Report has found that we’ll need £23,000 per year to live comfortably in retirement. This is poles apart from what UK savers are on-track to receive, at just £6,000 per year.
On average, Brits put £325 per month into their pension pot. However, it seems that we’re prioritising debt over saving for our future. In True Potential Investor’s survey, 42% said they would use an unexpected £1,000 to pay off debts.
Your pension pot will likely need to support you for around 20 to 30 years, so it’s important to build up a healthy amount. How much you need will depend on a number of factors. When pension planning, consider the following:
In retirement, you’ll often have fewer outgoings than what you previously had as a result of your changing circumstances. For example, your children may no longer need financial support or your mortgage may be substantially less or paid off.
Generally, the earlier you start, the more you’ll accumulate ahead of retirement.
Don’t forget that you’ll be able to access your State Pension when you reach retirement age — currently at 65 for men and 60 to 65 for women, although changes are expected in May 2017. You’ll be able to use your State Pension to essentially top-up your pension pot. Under the current guidelines, you’ll receive £7,582 per year.
State Pension guidelines are constantly shifting and, by the early 2060s, it’s expected that the state retirement age will be 70, so keep in mind when you’ll be able to access your funds.
What types of pension are available?
In order to make the right decisions for your future, you’ll need to be aware of the different pension types available.
With a personal pension, you’ll pay in an amount each month that is invested in order to use as income in retirement. Each year, you can invest a maximum of £40,000, although this is dependent on your earnings. You’ll be able to withdraw your funds when you reach 55 years old.
The funds can be used to purchase an annuity — a regular monthly payment paid until death — or use drawdown to take an income. You’ll also be able to access 25% of your pension pot tax-free. This can be as one lump sum or as smaller withdrawals.
Organised through your employer, you’ll pay a percentage of your wages into the pension pot, with your employer and the Government also contributing.
At present, the minimum you can contribute is 2% of your earnings — of this, 0.8% is paid by you, 1% by your employer and 0.2% as tax relief. This is set to increase in the coming years to 5% overall in April 2018 (2.4% from you, 2% from your employer and 0.6% as tax relief) and 8% in April 2019 (4% from you, 3% from your employer and 1% as tax relief).
To qualify for auto enrolment, you must be over 22 and under the state pension age, not currently in a scheme and earning over £8,105 per year. If you earn less or work part time, you will not be automatically enrolled, but can always opt in.
Defined contribution vs defined benefit
Defined contribution pensions can either be a personal or workplace pension. The money that is paid in by either the employer, employee or both is invested, so the amount you receive depends on the investment amount and the overall performance.
Defined benefit pensions are always workplace pensions. The amount you contribute is dependent on your earnings, the time you’ve worked for your employer and the pension scheme rules. As a result, you’re guaranteed a certain amount in retirement.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Tax rules can change at any time.