Emilie Bellet, founder of financial platform Vestpod, demystifies pensions
*This article is provided for information and educational purposes only and does not constitute financial advice. You are advised to consult with an independent financial advisor for advice on your specific circumstances.*
Sorting out our pension can seem incredibly daunting, which is why it’s something we often push to the bottom of our to-do list. You might not have a pension at all, or perhaps you’ve stopped contributing or find yourself reluctant to add more to your pot. Whatever the case, don’t worry: it’s never too late to get started, and it’s not nearly as complicated as you might think.
Saving into a pension is especially pertinent for women because, on average, we tend to live longer but retire with less than half the income of men. There are myriad elements that come into play to make this happen, including the gender pay gap, complex jargon, a lack of confidence and the motherhood penalty. If you took time off to have children, for example, it’s likely that you stopped contributing to your pension without even realising. Add the high cost of childcare and missed potential promotions to the picture, and you’ll find that your career and pensions are suffering because of the ‘motherhood penalty’. The best way to try to bridge this is to plan ahead with your employer, but also with your partner (if you have one). Together, you can look at your collective income and see if you could afford childcare to both stay in employment. If you’d prefer to take time off work, have a conversation about your partner potentially contributing to your pension on your behalf.
Is the State Pension enough?
You might think that the government will support you in old age, but unfortunately, the State Pension alone might not be enough for you to comfortably live on. While you can qualify for the full State Pension if you have contributed to National Insurance for at least 35 years, the sum sits at just over £9,350 a year (you can check your state pension forecast here). Note that the state pension age is currently 66 but will start increasing over the coming years, so it’s important to think about additional pension savings or income to secure a stress-free retirement.
Claiming Child Benefit helps your pension
Don’t forget to claim Child Benefit if you are planning to or already have children. Child Benefit is an allowance, usually paid monthly (£21.15 a week for your first child and £14 per week for other children). While the sum isn’t huge, what’s important here is that the person who claims it will get National Insurance credits towards their state pension if they aren’t working. This means that even if you’re not qualified to get the allowance (eg. if either you or your partner earn over the £50,000 tax-free limit), you should still claim it so you don’t miss out on National Insurance contributions (NICs), as these could affect your eligibility to claim the state pension.
Make your money work hard
If you’re already saving – well done! Cash savings provide a vital safety net that you can fall back on should things go awry. Once you have emergency savings squirrelled away and repaid your expensive short-term debts, it’s time to think about investing for the long term. Since your investments compound over time, they make your money work harder for you and give your savings a boost. The earlier you start investing, the more you’ll benefit in the long-run — stock markets tend to perform better than cash over the long haul, so think 5-10 years +.
Remember that pensions are invested in the stock market (in assets such as stocks and shares, bonds, cash and property), so if you have a pension you’re already an investor! You can consider investing in the stock market with a Stocks & Shares ISA or a Lifetime ISA, but that’s a subject for another day.
Are private pensions worth it?
In addition to your state pension, you can also save money into a private pension. When you put money into your pension, you get tax relief on your contributions, which means that some of your money that would have gone to the government as tax goes into your pension instead, and your pension grows largely tax free. You can access your private pension from age 55 (57 in 2028). There are 2 types of private pensions:
- A workplace pension is a pension you’ll typically have if you are employed and is arranged by your employer. You are normally auto-enrolled to a workplace pension (defined contribution scheme), and at least 8% of your monthly earnings will automatically be invested into your pension each month (5% from you, and a minimum of 3% from your employer). It’s also important to check whether your employer is matching your contributions, as it will help your pot grow faster.
- A personal pension is a pension you choose to open and pay into yourself. You’re allowed to have a personal pension as well as your workplace pension and state pension. The most common type of Personal Pension is a Self-Invested Personal Pension (SIPP). If you’re avoiding sorting out your pension as a self-employed person, you’re not alone. According to the IPSE, only 31% of self-employed people pay into a pension. The reasons for this vary, from having a variable income to worrying about running out of cash. But remember, it’s completely okay if contributing monthly doesn’t always work out! Progress isn’t linear.
Connect with future you
Now, let’s talk about giving your pension a good ole’ boost! To start, you need to have a rough idea of how much you need to be putting away toward your retirement. Connect with future you, and really picture the lifestyle you’d want. Then, you can use a pension calculator to figure out how much money you will have in your pension pot at the end of your working life and what that means in terms of your retirement income.
Automate to accumulate
Try to automate your savings and investments. It sometimes feels like it’s never the right time to save or invest, so setting up a monthly direct debit the day you get paid, based on your budget and your goals, will help you save consistently and smooth out your returns. If you’re worried about not knowing how to invest your pension, take some time to learn about investing, consult a professional and leverage existing tools and platforms such as robo-advisers or use ready-made portfolios. A quick online search for “Robo-advisers UK” will yield plenty of helpful comparison websites that offer reviews, minimum deposits required, products on offer (ISA, pensions), as well as general pros and cons.
Consolidate old pensions
Find old pensions you may have from previous jobs. It can be useful to consolidate your pensions because it’ll help you see if you’re on track to meet your goals and requires less admin. However, make sure that consolidation makes sense for you, as you could potentially lose valuable benefits. In these instances, it’s always best to consult a financial adviser for a tailored approach.
Make the most of your allowance if you can. You can contribute the maximum of 100% of your earnings in a year or £40,000 a year (annual allowance). You should be mindful of the £1mn lifetime allowance (the limit on how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefit).
Remember to talk about pensions with your partner, and always plan together. You can pay into each other’s pensions – if your partner is not earning, you can pay up to £3,600 per annum into your partner’s pension if they are not working (£2,880 before tax relief) and you can also add to their pensions if they work.
Trying to get to grips with your pension can feel exhausting, but it’s well worth your time. If you think you need additional support, you may be able to get pension awareness and education sessions through your workplace, but there are plenty of free resources online (visit the government website MoneyHelper), too. To get individualised support and advice about your pension, always speak to a financial adviser. But regardless of the route you decide to take, remember that paying a little more attention to your pension today will make a big difference to your future, so why not start now?