These days joining a pension is easier than ever. If you’re at least 22 years old, earning £10,000 or more a year and have not reached State Pension age then you are eligible for auto-enrolment into a workplace pension scheme. Let’s explain what being auto-enrolled means. It really is a good thing!
The government determines the maximum contribution you and your employer must make. The current minimum payment is 8% of your earnings, with at least 3% paid by your employer and the balance of 5% made up by you and tax relief.
If lady luck is on your side, then your employer will pay the whole amount on your behalf. Either way staying enrolled in your workplace pension makes perfect sense now and in the long term.
You can pay in a little extra whenever you like, whether it’s direct from your pay or as a cash sum. If you can manage extra each month, it can make a significant difference. For not much more than a weekly posh coffee you could really give your pension some extra froth.
If you notice that you and your employer already pay in higher contributions to your pension this could be because they use basic salary, or perhaps include bonuses as the basis for the payments. Have a chat to your employer if you want to know more.
If you are a basic rate taxpayer, you get 20% tax relief. So, for every £80 you contribute to your pension the government will top it up by £20. If you’re a higher or additional rate taxpayer then you get a higher top up. Getting tax back is a feel-good factor for everyone and the great news is that pensions deliver on this better than virtually every other type of savings plan or investment. Tax treatment depends on your individual circumstances and may be subject to change.
You are unlikely to regret having a healthy pension pot and a comfortable retirement income. A pension is still one of the best ways of saving for your later life when you can kick back and relax, start a new career or seek out those new avenues you have been meaning to explore for ages.
The fact that your employer and the government contribute to your pension too is double good news. It’s also important to remember that your pension savings grow virtually free of tax.
We’re generally living longer, healthier lives these days and that’s good news. As a result, the government introduced auto-enrolment to improve saving levels throughout the country. It also encourages people to think about and contribute towards a pension. This should help more people than ever to have a better income when they reach retirement. And more income means having the freedom to choose the kind of retirement you would like.
It’s possible to do this when you are first enrolled, or at any stage afterwards. You’ll need to think carefully about doing it though as your employer is paying in free money for you and that’s very valuable. If you opt out then you have to be legally re-enrolled after 3 years, but most employers are flexible and will allow you to re-join at any time if you need to take a short break.
Companies use a wide selection of pension schemes to auto-enrol their employees. Generally, it is the company, sometimes with help from their advisers, that chooses the scheme and the provider.
Your pension scheme could be a money purchase, or defined contribution pension. This is where the money you and your employer pay in gets invested. The size of your pot then depends on the contributions made and how well your investments have performed.
Alternatively, your pension may be a final salary or defined benefit scheme. This is where you and your employer make contributions in the same way as outlined above, with the difference being that you receive a guaranteed income at retirement. Your guaranteed income depends on how many years you have worked for the company and your earnings at retirement, or in the years leading up to it.
All types of auto-enrolment schemes must satisfy certain quality standards. The charges applied for managing your pension are capped to give you value for money. This could mean more money to live on when you retire. An investment fund has to be available to manage your investments, but you are free to make your own choices.
Several house-hold name insurance companies offer auto-enrolment pension schemes. With millions of workers becoming pension members for the first time some new organisations entered the market to deal with the demand, so there’s lots of choice out there. These new providers include:
We can help you make the best possible decisions when it comes to your pensions. We are authorised and regulated by the Financial Conduct Authority.