Pensions

What it is....

You may work from your early 20's until your mid 60's, leaving 20 or so years with no income, unless you have saved. As a young person you are unlikely to have thought about your old age and even less about how you are going to afford it. Whilst it might not suit you to begin saving straight away it is well worthwhile to find out a little bit about pensions and how you will be affected now.
Everybody, no matter how young, needs to plan for their retirement. This doesn’t mean that you have to start putting money away every month from today! Having said that the earlier that you start to save the longer your fund has to build up. There are benefits to saving toward a pension as well as you will find out later. Remember as you read this that pensions are taxable, just like any other earnings, so you need to deduct tax from your budgeted figures.

There are two parts to your pension to consider.

  • State Pension, which in itself has two parts.
    • Basic State Pension.
    • Additional State Pension.
  • Private or Company Pension.

We can consider each section in turn.

Basic State Pension.

  • The amount you get depends on the number of National Insurance Contributions that you have built up over your working life.
    • If you have paid your full National Insurance Contribution for 30 years you will qualify for the maximum basic state pension.
    • If you couldn’t pay your full National Insurance Contribution then the government may pay your contributions for you.
  • In 2018/19 the basic state pension for a single or married person is £6,549.40 per year - paid weekly, two weekly or monthly. This amount may be greater if extra contributions have been made.
  • The earliest you can claim your pension is currently aged 65 for both men and women.
    • This is rising to age 66 by April 2020
    • Age 67 by 2034 - 2036
    • Age 68 by 2044 - 2046
    • Use this wizelink to the State Pension Age Qualifier to find out when you will be able to claim your pension.
  • The pension amount generally increases each year in line with inflation.
  • Your pension ends when you die.

Additional State Pension

  • You build up your additional state pension if you are employed and earning over £6,549.40 per year.
  • You can also build up you additional state pension if you are looking after children under 12 and are claiming child benefit or caring for a sick or disabled person for more than 20 hours per week.
  • You can’t build up your additional state pension if you are self-employed or un-employed.
  • The maximum additional state pension is currently £8,546.20 per year - paid weekly, two weekly or monthly.
  • This amount generally rises every year in line with inflation.
  • You can claim your additional state pension at the same age as your basic state pension.
  • If your spouse dies then you may be able to inherit part of their additional state pension, which is paid until you die.
  • If you have a personal or company pension you may get less Additional State Pension.

Although these amounts may look like a lot of money to you now, you should plan to supplement the state pension with a personal or company pension.

  • You can have both a company pension plan or plans and a personal pension plan or plans.
  • One great benefit of saving for a pension is that you get money back in tax relief.
    • This means that f you normally pay 20% income tax, then for every 80p that you save toward your pension the government will add another 20p making the contribution up to £1.
  • By saving toward a pension you will be locking your savings away until your retirement. You cannot get at them before your chosen retirement age.
  • Both personal and company pensions may have a lower retirement age than the state pension.
    • It could be as low as 55.
  • Even if you take your pension, you are still entitled to work.
  • You don’t have to take your personal or company pension at your chosen retirement age.
    • You can leave the fund to grow more and take it when you are ready.

Personal Pension Plan

  • Can be set up at any time, whether you are employed or self-employed.
  • You can have more than one personal plan.
  • You should seek the help or a Independent Financial Advisor (IFA) before deciding on the best one for you.
  • They are generally available from banks, building societies and life insurance companies.
  • You do not have to pay into your plan regularly.
  • You can begin to take your pension at any time between 55 and 75
  • You can take 25% of the value of the pension fund as a tax-free lump sum.
  • The remainder can be drawndown over the rest of your lifetime or you can buy an annuity which will give you a monthly income for the rest of your life.
    • Annuity rates vary depending on your age, sex, health, whether it is inflation linked and prevailing market rates at the time you buy it.
    • Once you are 'locked in' to an annuity rate you cannot change it.

Stakeholder Pensions

  • These are low cost, flexible, personal pensions which are designed at encouraging young people to start a pension early.
  • They have low charges attached to them and it is easy to stop and start payments.
  • You can begin to take your pension at any time between 55 and 75
  • You can take 25% of the value of the pension fund as a tax-free lump sum.
  • The remainder must be used to buy an annuity which will give you a monthly income for the rest of your life.
    • Annuity rate vary depending on your age, sex, health, whether it is inflation linked and prevailing market rates at the time you buy it.
    • Once you are 'locked in' to an annuity rate you cannot change it.

Company Pension Plan

  • You can have more than one company plan.
  • Your employer may make regular monthly contributions.
  • You may not have to contribute at all.
  • The more that is contributed each month, the larger the pot at retirement.
  • There are generally two types of company scheme
  • Defined Contribution or Money Purchase Scheme.
    • The contributions are put into you scheme which is managed for you until you reach retirement age.
    • 25% of this pot can be taken as a tax-free lump sum at retirement.
    • You have to buy an annuity with the other 75% either at your retirement age or by the time you reach 75.
    • The annuity pays you a guaranteed amount each year for life which may go up in line with inflation.
    • When you die, part of the annuity may be paid to your spouse until they die.
    • The annuity ends at this point and the money is gone.
  • Final Salary Scheme
    • These are not very common anymore as they are expensive to run for employers.
    • At pensionable age, the amount you are paid as a pension is based on the salary you have earned with that employer.
    • It is often calculated in 60th. For example:
    • If you have worked with an employer for 10 years at retirement you should be entitled to 10/60 of your final salary as a pension each month. So if you were earning £2,000 per month before income tax, you should get 10/60 of £2,000 or £333.33 per month before income tax.
    • You are entitled to take 25% of a calculated ‘pot’ as a tax free lump sum at retirement.
    • Your monthly pension will reduced as a consequence.
    • If you die then part of your company pension will be paid to your spouse until they die.
    • At this point your pension closes.

Wize Tips

  • Begin planning early - even if you can’t afford to pay into a scheme yet.
  • Don’t just rely on your state pension.
  • Begin paying into a stakeholder pension, personal pension plan or a company scheme as soon as you can.
  • The earlier you start to save the bigger your pot will be when you retire.
  • You get tax relief on your pension contributions.
  • You can take 25% of your personal or company pension pot tax free at retirement age.
  • All other parts of your pension, whether it is state, personal or company, are taxable.