Pensions are complicated. Sometimes it is hard to plan what is going to happen next week, let alone in twenty or thirty years. The government has been encouraging us to pay into pension schemes and save for our retirement and offered some tax incentives to do so. But what exactly are we paying for and what do we hope to receive at retirement age?
For many people in employment, pension contributions are deducted at source from wages, with employers also contributing to the pension pot. This is known as a Work-Based pension. Automatic Enrolment to a workplace pension takes place if you are over 22 years old and earn more than £10,000 per year. If you are paying into a Work-Based pension, it will be shown on your payslip and your employer will usually write to you and let you know the exact terms of your pension provision.
There are some exceptions – being in an EU cross-border pension scheme is one of them – but you can usually still join in the UK pension scheme if you want to opt in. As an example of how it works, if you contribute £40 per month (3% of your monthly wage), your employer will contribute £30 (2% of your monthly wage) and there is a further £10 contribution on tax relief, which makes a total of £80 per month (or £960 per year).
It is generally accepted that even the maximum UK State Pension is barely enough to live on.
In fact, the UK state pension is now the worst in the developed world, falling behind Mexico and Chile. Currently, the maximum UK pension stands at £164.35 per week, which is £8, 456.20 per year. Pensioners in the UK are frequently living in poverty, with 18.5% of over 75’s living below the poverty line. It is terrifying stuff, but is paying into a pension the best way to ensure a poverty-free retirement?
Obviously, a lot depends on how old you are when you start paying into a pension, your current salary, and any other savings plans or investments you may have. There are many online pension calculators, The Money Advice Service has a good one here. This can tell you how much your retirement income will be taking all your contributions into account.
A pension should be a tax efficient, long-term savings plan, which will offer a good return and a guaranteed income at retirement. But there have been some scares in the past, with private pension schemes performing poorly, or even going bust completely leaving many people out of pocket.
The current government scheme is protected by the Pension Protection Fund, to stop any similar problems occurring in the future and may prove to be the most efficient way of saving for your retirement. There are those who think there are more lucrative ways of saving, such as investing in property, but this requires a substantial initial investment, which may be out of the reach of most people.
In addition to a workplace pension, it is possible to take out a Personal Pension, provided by a private company. These can be paid into regularly, or with occasional lump sums. Whatever your pension provision, you will still be entitled to the basic state pension. Typically, you will need to pay in £100,000 over a working lifetime to receive a pension of £5,000 per year.
If you want to get to grips with your pension, you can find some excellent advice here. Whatever you decide, it is worth being informed so you can make plans ahead of time.