Most of us are aware of pensions in general terms. You likely have some sort of pension arrangement right now, even if you don’t know the full ins and outs.
However, there are certain things relating to pensions that you may not be aware of. With the help of some experts on the subject, I’m going to dig into this topic and lift the lid on some mysteries surrounding retirement savings.
What is a pension?
Just in case you need a quick refresher, a pension is basically a retirement savings account. You will likely be eligible for at least some State Pension to contribute towards your retirement if you live and work in the UK. But in most instances, an additional private pension is useful to supplement your income.
Considering pretty much everyone will use a pension in some form, they can be quite complex to grasp. For example, many people don’t fully understand the tax rules around pensions or even the fact that funds are often invested into the stock market and other assets.
It’s understandable if you don’t have complete knowledge of pension nuances. You may lead a busy life and have a lot of other things to worry about. But a quick review of retirement basics will really pay dividends in the long run.
What might you not know about your pension?
The experts over at the Pensions and Lifetime Savings Association have shed some light on this important topic. Here are five facts that you need to know about pensions.
1. The full State Pension allowance is £9,339
The full UK State Pension amount is currently set at £9,339 per year (or £179.60 per week). You will be eligible for this providing you have worked and paid National Insurance contributions (or been a carer) for 35 years.
Most people don’t know this figure, and you’d be forgiven if you don’t. Also, this amount is likely to change due to government policy and things like the triple lock formula. However, it’s worth being aware of this allowance because it will help you plan ahead and work out how much extra money you may need.
2. You’re probably enrolled in a workplace pension scheme
If you work for a company, you should be automatically enrolled in a pension plan. Each employer will offer different benefits, but the minimum contribution from you and your employer should combine to equal 8% of your total earnings.
This might be 5% from you, and 3% from your employer. But sometimes, workplaces pay in a higher percentage than the legal minimum, allowing you to potentially contribute a lower percentage. If you’re self-employed, you may have to make other arrangements, such as using a self-invested personal pension (SIPP).
3. There are tools to help you assess how much to save
Knowing how much you need in retirement can sometimes feel a little overwhelming to work out. Thankfully there are now tools you can use to assess your spending habits, which will allow you to calculate realistic saving goals.
Right now, you may just be saving and investing whatever you can afford. But as you get closer to retiring, it’s a good idea to have a clear picture of how much you will need for a comfortable retirement.
How much this will be will depend on the lifestyle you want. You may not want to spend your later years like a student, living off baked beans! Some rough figures from the Retirement Living Standards research show the annual income a single person might need:
- £10,000 – minimum living standard
- £20,000 – moderate living
- £30,000 – comfortable lifestyle
4. You can choose how to draw your pension
Once you get close to retirement, you will have different options available for how you draw your pension. This could be choosing an annuity (where you are paid a set amount each year), cash as a lump sum or a drawdown arrangement.
It’s really important to understand the benefits and drawbacks of taking any of these routes. This is why it’s often worth seeking financial advice as you approach retirement. This way, someone can assess your full financial picture and provide a personalised pension plan.
5. Information and advice are available
Even if you decide not to seek out financial advice, there are other resources you can use. These include services like MoneyHelper and Pension Wise that are endorsed by the government.
The most important thing is to be aware that you have options. There are places you can go for guidance on your pension. The worst thing to do is bury your head in the sand if you do just find it all too confusing.
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