The most common questions we get asked around pensions are;
1) When can I retire?
You can’t access your pension until 10 years prior to State Pension Age which means the earliest is currently age 56, but that will move to 57 shortly. When most people ask that question they have a date in mind but they don’t have the most important details to know whether they can afford to retire.
Most people don’t think about how much money they will need to fund the longest holiday of their life, and equally important what type of retirement they actually want. World cruises may not be everyone’s cup of tea in retirement, but most people will want to be able to afford a nice holiday every year for example. The work done by the Retirement Living Standards puts this into context and helps people visualise what retirement could look like with good funding or average funding. Next, a visit to your pension provider’s ‘what if’ calculators will really help you in working out how much you need to save, and help you balance current affordability against looking after their future self.
2) Are pensions worth it?
Pensions are the most tax-efficient way to save for your retirement. If you’re an eligible jobholder your employer must make a contribution, and those contributions help you achieve your retirement goals. You also get tax relief. In Scotland, that tax relief will be either 21%, 42% or 47% of your personal contribution. There is no other investment that uplifts your contributions by at least 21% on day one, that gets money added in from your employer and the funds you invest in also grow tax-free – it’s a win-win. If your tax rate is higher than 20%, you need to ask HMRC for the additional tax relief you are due, but remember if your pension payments are made by salary exchange or sacrifice, you will automatically get the relief and don’t need to ask HMRC for a refund.
3) What happens if I die?
Lots of people ask this question, as they think that as their employer has paid into their pension they would be due money back, but that’s not the case. I’ll focus on defined contribution (DC) pension pots as few people are in active final salary schemes now (and your scheme administrator can tell you what rules apply to your scheme if you are lucky enough to be in one).
For a DC pension, the answer is the whole pension pot belongs to you and you decide what happens to it on death. If you haven’t accessed your pension and you die before you turn 75, the full amount can be paid out to your beneficiaries free of tax and doesn’t form part of your estate – but you need to fill in a nomination form so your pension provider knows who to pay the money to. If you are under 75 and have accessed some of your pension or lump sum, or are over 75, there are differing rules – speak to an adviser to see how this affects you.
4) If I’m under 22 can I still join the pension?
This is to do with Automatic Enrolment rules as employers are only obliged to enrol eligible job holders over age 22, however you can opt-in and join the scheme if you wish to. As long as you earn more than £ 6,032 p.a, you’ll be entitled to an employer’s contribution. The earlier you start a pension, the better the retirement income you will have.
5) Where am I invested?
The majority of people in workplace pensions are invested in the pension scheme’s default investment fund, and whilst your employer will have selected default as being suitable for most employees, like everything else, one size doesn’t fit all. Check where you are invested via your scheme App and see whether it suits your needs, and if it doesn’t, take some advice and select a portfolio that is tailored to your needs. The default fund will suit a high number of individuals, but it won’t be right for everyone.
6) What is the minimum I can pay?
Under automatic enrolment, your employer will have chosen a scheme design and a contribution structure for their workplace pension scheme. This will set the minimum contribution you have to pay to receive your employer’s pension contribution. There are some schemes where an employee contribution isn’t required, but not many. Even if you are paying the minimum contribution just now, it’s a good idea to visit the pension provider’s pension calculators to see whether you are paying enough to give you the type of retirement you want. You do need to save for retirement, and Government figures show the average person will live 15-20+ years in retirement that a very long holiday that you have to fund, and paying the minimum probably won’t deliver what you want.
Anne Lawson, Employee Benefits Consultant
June 2023
Acumen Employee Benefits Ltd, FRN 916905, is an appointed representative of Acumen Financial Planning Ltd, which is authorised and regulated by the FCA, FRN 218745. The information is based on our understanding of current legislation, which is subject to change. The actions described in this text should not be regarded as advice. When considering pensions, independent financial advice should be sought.