Pensions – The Basics

We understand that the world of pensions can be a confusing and expansive one, but with over 40 years’ experience in Financial Planning and Advice, we have a pretty good grip on what’s out there and what you should be looking for, but firstly, let’s start by breaking it down and answering some of the most fundamental questions about pensions.
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What is a pension?

In Short; a pension is a savings pot or pots that you set up when you are in employment to provide an income when you retire. 

There are many different types of pension schemes.  Some may be run by your employer and other you can set up by yourself. 

You will be entitled to the full state pension if you have made 35 years’ (from April 2016) contributions (National Insurance). If you’ve made fewer than 35 years’ contributions and at least 10 years’ worth, you’ll still get a basic state pension – it will just be adjusted to reflect the number of qualifying years you have.

For more information on the State Pension you can check out https://www.gov.uk/check-state-pension.

When should I start adding to my pension?

We would always recommend that the earlier you start the better.  You should start thinking about a pension as soon as you start earning money.  However, we would also recommend you prioritise your savings;  if you have debts to pay off or similar, it’s best to work out what needs to be done with the highest urgency.

Your monthly budget can help with this.  You can see your list of incoming and outgoing and prioritise the outgoings from there.

How much should I put into my pension?

As above, we would recommend you add as much as you can budget for.  Your monthly budget will also help you to work this out. 

There are various ‘rules of thumb’ but we believe what’s best is to see what works in your budget.  Be realistic but also remember that the more you put in the larger the pension pot will be.

There are various options for Workplace pensions but if you are employed in the UK, are between 22 and State Pension Age, are earning over £10,000 and are not already in a Workplace pension scheme you should be automatically enrolled in the Workplace pension scheme.  You don’t need to do anything, but there should be the option for you to increase and your employer to increase the minimum contributions.  The minimum contributions from 6th April 2019 onwards are 3% Employer Contribution and 5% Staff Contribution.  You can choose to opt-out of the Workplace pension, this would mean that you would lose Employer Contributions as well. 

Are there limits to what I can put into my pension?

The pension contribution limit is currently 100% of your salary, capped at £40,000 (known as your annual allowance) on which you can earn tax relief.  So, if you were to pay in the full annual allowance limit and you pay income tax at the standard rate of 20% you would receive a maximum sum of £8000 of pension tax relief (that is a contribution of £32,000 plus £8,000tax relief equals £40,000).  Your annual allowance is made up of all contributions, from yourself, your employer and any third parties. 

If you add more that this into your pension you won’t receive tax relief on any amount over the contribution limit.

As this is a complicated subject we would recommend you seek professional advice, so that you can chat to someone about your unique set of circumstances and they will help you find the best solution for you.

How much can I expect to live on when I retire?

If you are eligible for a State Pension it is currently set at £168.60 per week.  The actual amount that you get will depend on your National Insurance record.

You can add to that state pension by building up a company pension and a personal pension or similar.

Chatting things through with a professional will be a big help, they will be able to give you an illustration of how that pension will do and what you can expect to get when you retire.

Here we have only scratched the surface of what a pension is – we hope that you have a better understanding of the basics.  We have many years of experience working within this industry, and access to the most up-to-date systems to help us find the best deal to suit your individual needs.  If you want to chat through your pension needs with us, please call us on 0131 557 6778 or email colin.mccallum@heritableltd.co.uk

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