SURVEY after survey has shown that, as pension savers, we fail to understand our pensions, and so we are saving blind: we do not know how our pensions work, how much we will get when we retire, and how we can influence that final income by choosing to save more now.
Today we are answering just a few of the key questions on the various types of pensions: the state pension, personal pension and workplace pension.
If most of these details are new to you, you may feel you could benefit from a chat with a financial adviser, to get your pensions explained, and your pension saving sorted. (Remember, all the information below relates to current rules, which may change in future.)
:: When will I qualify for my state pension?
The current state pension age for both genders is 66, rising to 67 in 2026-2028.
:: Will I get the full state pension?
If you have paid 35 years of national insurance (NI) contributions, you get the full whack – which is currently an average of £175.20 per week. This is due to rise by 2.5 per cent this April, but after that, further rises could be adversely affected, as the government tries to recover the massive costs of the past year.
::What if I don’t have the full 35 years of NI contributions?
If you have 10 years or more of contributions, you currently qualify for a lower level of state pension. The amount you get will be linked to the number of years you have paid.
:: In a personal or workplace pension, what do I get from my employer and the government?
In a workplace pension, your employer also puts in money for you. The minimum is currently a total contribution equivalent to 8 per cent of your salary, with at least 3 per cent employer contribution, on earnings above £6,340, and tax relief from the government too. On payday, if you put in £40, your employer will put in £30, and you get £10 tax relief, so a total of £80 goes into your pension. In a personal pension, if you are paying tax at 20 per cent, then 20 per cent of the total going into your pension is government tax relief. That means if you want a total of £100 to go into your pension, you pay in £80 and the government tops it up by £20. Higher rate taxpayers in the 40 per cent tax bracket (i.e. earning £37,500 or more) get higher tax relief, paid at 40p in the pound.
:: How will my pension income from these pensions be calculated?
It depends what kind of scheme you have. If you have a final salary (defined benefit) workplace pension, what you get will be worked out based on your salary at retirement combined with your number of years of service – a very comforting guarantee to have. If you have a defined contribution (DC) pension, there’s no such link or guarantee – it will depend on how much you paid in, and on how the investments performed.
:: How can I take funds from my pension when I retire?
Since 2015, taking funds out of your DC pension has been much more flexible – but this also means much more complicated. You can take out (or ‘draw down’) lump sums to spend or reinvest; you can use all or part of your pension savings to buy an annuity (which gives you the security of a guaranteed monthly income for life); or you can even take out the lot in one go. But be warned: this is so complex and the tax rules so complicated that doing it without financial advice could be, well, extremely ‘taxing’.
:: How much of my personal or workplace pension can I take tax-free?
The first 25 per cent you can draw out is tax-free, and after that any further withdrawals will be taxable as income. But watch out for the greedy taxman! If someone draws out a large amount in any single tax year, they risk becoming a 40 per cent taxpayer, on part of their money, for the first time in their life!
:: I know I don’t have to wait for the state pension age of 66 to dip into my personal pension - but how soon can I do that?
You have to be at least 55 to draw out funds without incurring a penalty, but this is set to rise to 57 in 2028. If you draw out earlier, the taxman will hammer you with a whopping tax bill of (at least!) 55 per cent on your funds.
Those are our small sample of questions. Don’t feel too bad if you didn’t know them all because most people, working from their own knowledge, can only answer less than half!
If you'd like to learn more about where you stand with your pensions, how much you are likely to have to live on when you retire, or if you want to plan ahead and increase your contributions right now, give us a call. We can promise you a friendly and informative chat!
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com
