A pension is money you’ll use to live on when you retire. Most people get a State Pension but this only provides for your basic needs. To make sure you have the standard of living you want in your retirement you will need to save in a pension scheme. Everyone needs money for their retirement, to support you and give you a decent standard of living. You may also need to support a partner or other people in your family.
Nowadays, people live longer so your pension will need to last you longer. This means you’ll need to try and save more. Many older people live in poverty because they haven’t been able to save enough. The help offered by the State can change over time. If your retirement’s a long way off you shouldn’t assume that all your needs will be covered by State benefits, or that State Pension rules will be the same as now. So it’s wise to start putting some money away as early as you can.
How do pensions work?
You put aside money during your working life into a pension fund. When you reach retirement age, you get your pension to live off for the rest of your life. The amount you get will depend on how much you have saved. This is why it’s important to start a pension as soon as you can. There are several ways you can save for a pension. Your employer may offer a workplace pension scheme or you can take out a personal pension through an insurance company. You may do both during your working life. Whichever way you choose, pensions basically work like this:
- you, and sometimes your employer, pay money into your pension on a regular basis
- the money you pay in is invested so that the pot of money (fund) can grow
- When you reach retirement age, you get your pot of money to live off for the rest of your life. Usually, you will get a regular income but you may also get a lump sum.
If you can, it’s better to start a pension as soon as you start earning. If you’re young, it’s tempting to think that pensions are for older people. But the earlier you start, the longer you’ll have to put money away. You may also have more options later on to retire early. People who leave saving till later in life can end up with smaller pensions or have to work longer to make up the money.
How much pension will I need?
If you start saving for your pension early in your working life it may be difficult to predict what your exact needs will be when you retire. Plan to put away as much as you can afford but don’t worry if it’s not as much as you’d like to start with. It can be better to save small amounts that have a long time to grow in value. If your income improves, you’ll be able to increase how much you put away for your pension.
If you’re starting to save later in your working life you may have a better idea of what your circumstances are likely to be. For example, you may already have a family or own a home. This can make it easier to work out what level of income you’ll need for your retirement but you’ll have less time to save it up, and the amount of money you’ll need to save may be higher. You may need to prioritise your budget differently so that you can afford to pay extra into your pension. For example, you might cut your spending on non-essential items like going out, so that you can afford to save a bit in your pension.
Saving for your pension is a long-term commitment. Work out your budget to make sure you can afford the regular payment into your pension pot. Think about the lifestyle you want when you retire and the commitments you’re likely to have. Your needs may change as you go through life so review what you’re saving regularly to make sure you’ll still be able to have the lifestyle you’re planning. Here are some of the things to take into account when planning how much pension you’ll need for your retirement:
- The cost of your home – If you own your home, your mortgage is often one of your biggest expenses. If you can pay it off before you retire, your outgoings will drop considerably. You can work out how many years it has to run. If you rent your home, you’ll still have to pay rent when you retire
- Fuel bills – Gas and electric bills may be higher if you’re at home more and as you get older. Make sure you budget a bit extra and investigate the benefits of energy efficiency measures for your home
- Paying your debts – Plan for all your loans to be paid off before you retire
- Some expenses may be lower or disappear when you stop working. For example, you may manage on less or cheaper clothing. You might save on travelling expenses or lunches.
- The lifestyle you want to enjoy – What kinds of things will you have to pay for? Will you need more or less money for holidays? How much money will you need for hobbies or other activities?
- Your partner – If your pension is also supporting a partner or someone else, remember to take their expenses into account as well.
- What other income will you have from your other savings and investments? Don’t assume the benefits system will be the same as now, particularly if your retirement is a long way off. If things change during your working life, remember to review your pension plan
- The State pension age is changing. This is the age at which you’ll be able to claim State Pension and currently you have to be 66 to qualify. In 2021 that changes to age 67 for people born on or after January 1st 1955 and in 2028 it will be age 68 for those who were born on or after January 1st 1961.
What if I can’t afford to save for pension now?
If you don’t think you can afford to save for a pension, don’t worry. Even if you can’t afford to save anything now or if you’re not working, start as soon as you can. Don’t think because you haven’t saved before that it’s not worth saving later because it almost always is. You may be able to pay extra amounts (contributions) into a pension fund when you are working, to make up for lost time and you’ll still be able to get the basic State Pension.
What if circumstances change for me?
As you go through your working life, things will change. It’s important to review your pension situation regularly, particularly when there is a change in your circumstances, for example, when you get married or divorced, if you change jobs or can’t work for any reason. If you are saving for a partner, remember to review their pension situation and needs as well.
Where should I go to set up a pension?
There are hundreds of pension products on the market and choosing between them can be confusing. You should consider getting proper pension advice from a Financial Broker because:
- Financial Brokers are experts in pensions and qualified to give advice on all aspects of pension planning.
- They have access to the widest choice of provider and will shop around for you and compare products from different providers.
- They will advise you on the most appropriate product for you and give you a summary of all the important facts about the pension plan.
- They will tell you what charges you’ll have to pay and when. These can include administration fees, transfer charges, charges for managing your investments, penalties if you miss a payment or take your pension early. Remember, charges that are deducted from your fund will affect the amount of pension you get.
- They will advise you on how your funds should be invested and what choices you have.
- They will conduct a risk assessment to make sure you are happy with the level of risk you are taking.
- They will offer you a regular review to deal with all the little hiccups life will throw up along the way.
Do’s and Don’ts
- Do take professional pension advice.
- Do take your time to understand the information you have been given before you decide on what to do.
- Do not sign anything until you’re completely happy.