We all know how important it is to save towards our retirement, but just how much do you know about pensions? To explain your options and the benefits pensions can bring, personal pension provider True Potential explains the essentials:
UK attitudes towards pensions
We’ve witnessed a significant shift in attitudes towards pensions in the UK. In 2015, Office for National Statistics (ONS) figures showed an increase of 12% in the number of people not saving towards retirement because they couldn’t afford it. Attributed largely to rising living costs, the number of people not contributing anything grew from 38% in 2010/11 to 50% in 2014/15.
In 2016, we witnessed a more positive shift in pension attitudes. Data from True Potential’s Tackling The Savings Gap Q3 2016 report found that the percentage of those putting nothing towards their retirement has dropped by 4% from 39% in Q2 2016 to 35% in Q3. A significant increase was witnessed in the 24-34 year old age group, with the number of those who failed to make a contribution dropping to 19% from 26% in the previous quarter.
Worryingly, 57% of over 55s said they hadn’t decided how they would access their retirement pot. Clearly, this underlines the need for greater transparency around pension information.
How much do you need to put away?
Your pension is important, but how much will you need to live comfortably in retirement? True Potential’s Savings Gap findings estimate that £23,000 is needed each year in retirement to live a comfortable life. However, at present, the UK is on track to receive just £6,000 per year from an average contribution of £325 per month.
The amount you save or invest will likely need to sustain you for around 20 to 30 years, so the earlier you start contributing to your pension fund, the greater it could potentially be. The amount you’ll set aside will need to be manageable — stretching yourself too far could leave you unable to make other financial commitments.
When determining how much you’ll need in retirement, you should consider:
- Your future outgoings — by the time they retire, many people have paid off their mortgage, will no longer need to commute to work and will have grown-up, with non-dependent children. This means their outgoings will likely be significantly lower.
- Your State Pension — You can use your State Pension to ‘top-up’ your retirement fund. Post April 2016 retirees will receive £7,582 per year, which breaks down as £151 per week. Remember that you have to reach State Pension age before you can access this pension.
By being aware of the available pension types, you can make the right choice for yourself:
With a personal pension, you’ll pay in an amount each month that is invested to grow the pot before you retire. £40,000 is the maximum you can invest each year, although this is dependent on your earnings.
You choose how your contributions are invested and can withdraw your funds when you reach 55. From there, you can purchase an annuity — a regular monthly payment that’s paid until you die — or take an income using Drawdown. 25% of your pension pot can be withdrawn tax-free, either as a lump sum or smaller amounts.
Organised through your employer, auto-enrolment is a type of pension investment scheme where you, your employer and the government contribute.
At present, the minimum contribution to auto-enrolment is 2% of your earnings, comprised of 0.8% from you, 1% from your employer and 0.2% tax relief. This is set to increase in the future to:
- 5% in April 2018 (2.4% from you, 2% from your employer and 0.6% as tax relief)
- 8% in April 2019 (4% from you, 3% from your employer and 1% as tax relief)
To qualify for automatic enrolment, you’ll need to be over 22, under the State Pension age, earning over £8,105 per year and not currently in a scheme. Other workers may be able to opt in and you can also opt out. All employers must offer auto-enrolment or a similar scheme by 2018.
Defined contribution pensions
A type of personal or workplace pension, money is paid into a defined contribution pension by either the employer, the employee or both. The amount paid out depends on how much is paid in and how well the investment performs.
Defined benefit pensions
This type of pension is always a workplace pension, so the amount paid in retirement is dependent on your salary, how long you’ve worked for your employer and the scheme rules. The amount you receive when you retire is guaranteed.
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.