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The pension has long been a contentious issue for policymakers, employers and workers in the UK. In December 2017, research by the Department of Work and Pensions found four in ten employees were under-saving for their retirement, with over half of these earning a middle or high salary.
However, new research, released just in time for Pension Awareness Day on September 15, has revealed that the number of peopled enrolled in a workplace scheme has reached a record high of 41.1 million in 2017, a 49% increase in the last five years.
While these numbers are encouraging, the work of the Department of Work and Pensions and initiatives like Pension Awareness Day is far from done. Continuing education and awareness on the importance of pensions is essential – after all, how much do you know about your money?
What is a pension?
A pension is essentially a long-term savings plan that you can access later in life or in retirement. It’s not compulsory, but will be very handy to have if you want to maintain a comfortable lifestyle beyond working age.
There are three types of pensions: State Pension, workplace pension and personal pension. A State Pension is a regular government payment that kicks in when you turn 68 and is payable for the rest of your life. This is funded by your National Insurance contributions and will depend on how much you’ve earnt over your working life. A personal pension is a scheme you set up yourself and voluntarily contribute to. These contributions are privy to 20% tax relief, meaning that the government will add a further 20% to any money you pay in.
For the purposes of this article, we will be focusing on your workplace pension.
How much am I putting away?
Also known as a company pension, this scheme is set up by your employer and welcomes contributions from yourself, your employer and the government. The minimum contributions, calculated off your pre-tax salary, are as follows:
|Until 5 April 2019||2.0%||2.4%||0.6%||5.0%|
|From 6 April 2019||3.0%||4.0%||1.0%||8.0%|
Some companies opt to contribute more to your pension, so you will need to ask your HR function about exactly how much they will pay.
How do I set it up?
Companies are legally obliged to enroll you in a pension scheme – this may be straight away, or after your probation. You can choose to opt out if you wish, but the procedure for this is dependent on your company’s pension provider.
What are the benefits of having a pension?
Most obviously, having a pension means you’ll have an income past retirement. However, specifically using a pension scheme attracts other benefits. Firstly, an employer and the government will contribute towards the fund, improving your balance. It is also, for the most part, tax-free, further increasing your balance.
What happens to my money?
Your contributions go into an account set up by a pension provider (as chosen by your employer). What happens next is dependent on the type of workplace pension you are enrolled in – it could either be a defined benefit or defined contribution scheme.
Defined contribution schemes
In a defined contribution scheme, the provider will buy investments on your behalf and add any extra money they earn through these investments back into your account. This scheme is generally more common than a defined benefit scheme.
Defined benefit schemes
In a defined benefit scheme, your end balance is based on how much you’ve earnt and how long you’ve been with the scheme.
When can you access your pension?
Your State Pension won’t be paid out until you turn 68. However, if you have a workplace pension, you can access some of it as a tax-free sum at age 55 – the exact amount is dependent on your provider. You won’t need to retire or stop working to access this money, and it can be used anyway you like.
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