In our recent article How can Millennials manage their money better, we explored some of the financial challenges facing people today, particularly those in their 30’s and 40’s.
A major challenge we looked at is the fact that many of us are not managing to build any significant savings. We are so busy with our day to day lives, and so financially stretched with all the demands being placed on us, that we are not really able to give much thought to the future.
One of the most effective ways to save for the future is to contribute to a pension. But many people shy away from this, thinking it’s far too early to worry about pensions and we can sort it all out later.
However, the earlier you become pension savvy, the better it could be for you financially.
In this article we take a brief look at:
The current situation in the UK is that both men and women receive their state pension at the age of 66. This will rise to 67 between 2026 and 2028, and is scheduled to rise to 68 between 2037 and 2039.
You can retire at any age you choose, but you cannot draw your state pension before this state retirement age.
The amount of state pension you receive depends on your National Insurance record. The full amount of state pension is currently £179.60 per week, before tax, but you will only receive this if you have paid enough National Insurance contributions.
You can check your current state pension entitlement by entering your details on the Gov UK State Pension forecast tool.
The reason why it’s never too early to think about pensions is that you need to plan ahead for the kind of retirement you want.
As we have just seen, the maximum state pension is £179.60 a week. This equates to an annual income of £9339.20. However, The Pensions and Lifetime Savings Association have recently produced a set of Retirement Living Standards. These are based on research with Loughborough University, and indicate the approximate level of annual retirement income you would need to support the kind of lifestyle you hope to have.
The lifestyles are defined as Minimum, Moderate and Comfortable, requiring income levels from £10,900 to £49,700 depending whether you are single or part of a couple, and the kind of lifestyle you want.
Retirement Living Standards | ||
Single | Couple | |
Minimum | £10,900 | £16,700 |
Moderate | £20,800 | £30,600 |
Comfortable | £33,600 | £49,700 |
It is worth noting that the above figures do not include any allowance for mortgage or rent; the assumption presumably being that by retirement people are living in their own home, mortgage-free. So if this is unlikely to be the case, these additional costs also need to be factored in.
It seems clear from all we have looked at so far that most of us will need some additional income for retirement, over and above the state pension. So we’ll now take a look at what options are available.
The two main additional pension options are either a workplace pension or a private pension.
If your employer operates a pension scheme you need to check whether you are enrolled in this. This should happen automatically if you earn more than £10,000 per year and are aged between 22 and state pension age.
Both you and your employer will then pay into your pension. The legal minimum total contribution for most people is 8% of their salary, and your employer must contribute at least 3%. The government Money Helper website has a workplace pension contribution calculator if you want to look at this in more detail.
You can also make extra payments – either by Additional Voluntary Contributions or salary sacrifice – into most occupational pension schemes if you want to do so.
You can choose to set up a private pension whether or not you already have a work pension. A private pension is another way of saving more money for your retirement. If you have a private pension you can pay into it either on a regular basis or by a lump sum.
There are different types of private pension, so if you do want to set up a private pension it is probably worth taking independent financial advice. This will help you to invest in a type of pension that is best for your needs, and will provide you with the best return for your money.
If you have either a workplace or private pension this could be of benefit in one of three main ways:
As we saw earlier, the standard of living you may want in your retirement is likely to cost more than you would get on state pension alone. So having another pension is a good way to boost that income, and the sooner you start, the better.
Many work pensions can be accessed before state pension age. So if you have a retirement age in mind that is before 66-68, you may be able to draw your work pension before then. It is worth checking this with your employer. If the work pension access age is later than you’d hoped, you may want to consider a private pension as well.
Most private pensions can currently be accessed from age 55, though this is expected to rise to 57 by 2028. Whenever you can access your private pension, you can usually withdraw up to 25% of its total value as a tax-free cash lump sum if you want to. Whatever you don’t withdraw remains in the fund to use as retirement income.
You will not usually be taxed on any pension contributions you make.
If you have a workplace pension your employer will normally handle this for you. For example they will often deduct your pension contributions from your salary before you pay tax. This would usually also apply if you make additional contributions. So as well as paying more money into your pension you are paying tax on a smaller portion of your salary.
Some private pension providers will also sort out the tax relief for you, for others you may need to complete a tax return to reclaim tax on your pension contributions.
If you are not sure about anything to do with tax on your pension contributions, check with your employer or private pension provider.
Yes you can. Whether you are drawing a state, work or private pension you can still continue to work and earn money.
If you are of state retirement age and still working, you may decide to defer your state pension. By doing this you could either increase the value of your state pension by around 10.4% for each year you do not claim it, or take the deferred amount as a lump sum later on.
Whatever your age, you will continue to pay tax on the total value of your income – including your pension(s). The current tax free threshold is £12570 a year. All income over and above this – from any source – is subject to tax of 20%, rising to 40% tax for income over £50270 a year.
You can find out more about personal allowance and income tax rates on the Gov UK website.
We hope that this article has provided food for thought about why it is never too early to think about pensions.
Check back here soon for more financial and lifestyle tips from direct lender Munzee Loans.
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