Tax treatment depends on your circumstances and is subject to change
You only have to look at current State Pension rates to see that it is unlikely to be able to compete with average salaries. So, if when you retire you rely on just the State Pension as a source of income, will you have enough to live on? Perhaps realistically the State Pension should be seen as a good starting point for your retirement savings, rather than the be all and end all. It is likely you will need other forms of income.
Today in 2021, there are real concerns for those who have not financially prepared for their later years. We see this issue reflected in headlines suggesting people could even face poverty after they finish work if they do not prepare funding for their retirement.
So in looking at what savings options are available to you let’s start by looking at the State Pension itself and how it has changed.
In the National Insurance Act of 1948, a contributory State Pension was introduced for men over 65 and women over 60. This approach continues today: we contribute to our State Pensions, via National Insurance contributions, so we are able to live well in our old age without our work incomes. Social influences (e.g. inflation) over the years have altered the rate of weekly pay out. However, in 2010 the government introduced the triple lock system. This meant that pension funds will rise by either 2.5%, the rate of inflation or the average earning growth.
The State Pension was designed to support people in their old age. For people living soon after the Second World War (when it first made an appearance) it was probably all that was needed. Since then, various diverse environmental factors means it’s unlikely to provide everything you need when you retire.
People live much longer in the 21st century. And there are more individuals in the post-work period of their lives than there were in the 1950’s. This means the State Pension has to be stretched further. Also, huge advances in technology, communications and medical science means we are able to do more in our retirement years. We all tend to dream of creating a great retirement in later life now whereas the original statutory amount was almost a prescribed amount which simply allowed people to get by.
The State Pension is fundamental to what you will receive in retirement so it is important you check it throughout your working career to ensure you will receive your full entitlement. But rates could differ.
You may ask why weekly pay-outs differ if it has a set rate? Well, basically it is because life tends to get in the way. Most people are likely to have more than one job in their lives so National Insurance contributions may become fractured. Some people may experience periods of unemployment when no contributions are made. Also, when an individual is self-employed contributions are made at the end of the tax year and may get missed.
You can see what rate of pension you will be receiving here. If you find you are below the full rate and you have the funds, you can add contributions voluntarily to get you back on track.
So, if your State Pension tends be the foundation of a savings pot in retirement, what other forms of income are there to complement it?
This is where you voluntarily contribute to a private pension provider on a regular basis. The pension provider invests money for you so that at retirement age you will have various benefits and, hopefully, a substantial pension pot. Today it is private pensions (along with work pensions) which tend to make up the greater proportion of an individual retiree’s pension funds.
This is where a small percentage of your weekly/monthly income is diverted as a contribution to a pension which is provided by your employer. Your employer will have made an agreement with a pension provider who will invest the money for you.
In 2008, a new government act stated that certain members of staff would be opted into any work pension scheme on starting work. This is called auto enrolment. Currently, if you are aged 22 or over, classed as a worker and earn more than £10,000 per year, you will be automatically opted in. Legally, 8% of your salary will go into this scheme for your future retirement. This may sound a lot, but the fact is you will not be on your own. Your employer will provide a minimum of 3% towards this figure. The government puts in 1%, which means only 4% actually comes out of your hard-earned cash.
The fact your employer is contributing towards your savings makes this a great way to save for retirement. Also, it helps you keep in mind the need for saving for the future.
You can opt out of a work pension but where else are you going to find free savings money?
We all tend to look forward to a time when we no longer have to work. A time when we can let go of stressful responsibilities, tiresome meetings, burdening deadlines and grumpy bosses. But there are positive factors to working as well. For instance, we meet colleagues and make friendships, we feel validated and valuable and we attain goals and rewards. So, returning to work after retirement may not be such a silly idea.
As well as adding to our social life and mental health, it could well offer a useful income which complements the State Pension. Delaying retirement offers more time to build up your pension pot and can lead to a higher State Pension rate.
There may be other income from other sources such as savings investments you may have, windfalls and financial gifts. These pots of money should all be considered. If there is a change in your financial circumstances it is a good idea to consider discussing this with your financial adviser.
Your State Pension is a great foundation for the funds you will need in retirement. So, don’t take it for granted. The career route and the obstacles you have encountered in your working life will determine whether you receive the full rate or not. Therefore, monitor what you will receive and, if you have the funds, make voluntary contributions where you can, to maximise pay-out.
Embrace the concept of retirement and get dreaming. How do you want it to look? What kind of future will you be looking for? Compare your current salary with what it can get you now. Then think about the kind of funds you will need to kick-start your dream – taking into account the possible effects of inflation. Is your work pension performing? Is it time to consider putting some money into a private pension?
Pensions can be pretty complex at the best of times but when you have an idea of the options available to you it can get pretty exciting! But don’t go it alone – get the advice of a regulated financial adviser and make the most of your pension options.
Good luck. Your dreams start here.
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
