There are three types of pensions that are available to consider when beginning to start saving. The state pension, the workplace pension and a personal/private pension. Here’s a little more detail and common considerations on each type of pension.
The State pension
The State pension is what the government contributes to your retirement income. Most UK citizens can claim the state pension on retirement if they have at least 10 years of National Insurance contributions. The age in which people can now claim the state pension is rising from 65 today to 68 in 25 years’ time and it may continue to rise.
The amount of state pension you will receive depends on how many years you’ve paid National Insurance contributions. To claim the full state pension you will need 35 years contributions. If you’ve made fewer than 35 years’ contributions and at least 10 years’ worth, you’ll still get a basic state pension however it will just be adjusted to reflect the number of qualifying years you have.
Workplace pension
If you are employed, you will be auto-enrolled into a workplace pension in which both you and your employer pay into. These can either be defined contribution or defined benefit.
Workplace pensions generally fall into two categories:
Defined contribution (also known as DC or money purchase schemes). This is the most common type of workplace pension today. Here, the final amount will depend on how much you have contributed, how this money was invested, and how the investments performed overall during the time the money was invested.
Defined benefit (also known as DB or final salary schemes). This guarantees an income based on the salary you earned in that workplace and how long you were employed. Depending on the scheme and your circumstances, these pensions can be really helpful for your retirement. They are most common in the public sector or in some big corporations, but most companies today simply can’t afford to pay for a guaranteed pension income.
What is auto-enrolment?
Auto-enrolment was started by the government in 2012 to get more people saving for retirement and reduce the burden of an ageing population. You are automatically enrolled if you are in a job, over the age of 22, and earn over £10,000 and work in the UK. This means you will contribute a percentage of your salary into your workplace pension and will keep doing that every month while you remain with that employer unless you choose to opt-out.
Most people stay opted in for the employer contribution. Government rules mean your employer has to pay into your pension alongside you. As of April 2019, at a minimum, you are required to pay in 5% of your earnings and your employer is required to pay in 3% of your earnings.
What if I’m self-employed?
If you’re self-employed, you currently don’t have access to any kind of workplace pension, although the government is looking into extending auto-enrolment in some way to address this.
Personal/Private pension
This is a pension that you set up to supplement your retirement income. These can either be stakeholder pensions or self-invested personal pensions.
This is a private pension that you can open directly through fund providers or through external companies. Unlike a workplace pension, you could have more control of where your pension is held and how you invested into it. There are many many different funds to choose from.
This means that you get to decide how much to contribute into the pension and how often, whether this be weekly or monthly, and the fund grows depending on how it’s managed. You may also be able to switch between funds, should you wish to although there may be a charge associated with this.
If you’re considering opening a pension scheme or have a few more questions regarding your current scheme, please get in touch today.