Back to basics – jargon busting and five key tips on pensions

Whatever your personal wealth, the tax benefits of a pension make it one of the most important tools to ensure you can enjoy a comfortable retirement, however jargon and a lack of knowledge can prevent many from saving as much as they can into their pension.

Pension file

Emma Watson, Head of Financial Planning and Advisory Services, Rathbones

Before we start let’s explain what a pension is as the terminology can make people think it’s something niche or archaic. A pension is just a type of long-term savings or investment vehicle that gets special tax benefits such as:

  • income tax relief at your highest marginal rate on any money added, so if you are a basic rate (20%) taxpayer and you add £80, an additional £20 will be added by the government
  • largely tax-free growth on money invested
  • 25% of the amount amassed can usually be taken tax-free

If that sounds good then you’ll know there’s usually a catch and in the case of pensions, the limitations are that:

  • there are limits on how much you can add to a pension each year
  • you won’t be able to withdraw any money from it until you reach a certain age (currently 55 and rising to 57 in 2028)
  • you can only take 25% of your lifetime allowance as a tax-free cash payment
  • withdrawing above the 25% will be taxed as income in the year you take it

​​1. Know what you already have

If you are in full-time employment, the chances are you already have a pension through your employer. Under the auto-enrolment rules introduced in 2012, UK employees over the age of 22 (but under State Pension age) and earning more than £10,000 before tax each year are eligible to be auto-enrolled into a pension scheme. This means that you and your employer could already be contributing to your pension fund. In fact, if you’ve held several roles at different companies, you could have several pensions – although you will only currently be contributing to the one started by your current employer.

If you’re self-employed then the onus is on you to invest in a pension yourself through one of the types of pensions that can be held privately, away from your employer such as a stakeholder, personal pension or a Self-Invested Personal Pension (SIPP).

Establishing how much you already have saved will help you to understand and plan for saving in the future. If you have multiple pensions you may consider consolidating these into one pot for ease. The government’s online service (Money Helper) can help you if you’re unsure how to access your pensions and their Pension Tracer can help you trace a pension you’ve lost track of.

2. Picture what you would like retirement to look like

When do I plan to retire? How do I plan to spend my retirement years? How much do I need in my pension pot to live comfortably? If you haven’t already asked yourself these questions, you should start now.

To live a comfortable retired lifestyle requires careful planning. First you need to know what you want your retirement to look like, then you can work out how much you’ll need to make these plans possible. A financial adviser will be able to help you with these calculations and ensure you are on track to have enough to meet your goals whatever they may be.

3. Power through the jargon

Learning about pensions can be overwhelming; all the vocabulary, the different types of schemes, what you have access to, the list can seem like it goes on forever. However, being well-informed about your pension is vital to ensure you make the best decisions with your money. Speak to people in retirement already, read up on it and have a conversation with a financial adviser about pension investments if in doubt. Once you have got to grips with the jargon, you’ll come to realise it’s not that complex, and feel more empowered to make decisions about your money and future.

4. Start early

Your pension is meant to fund your lifestyle throughout later life. The earlier you begin to put away money in your pension pot the better because it will have a longer period to earn interest or investment returns. It’s particularly important due to inflation which can have the effect of eroding the actual value of your funds in real terms if the rate of inflation exceeds the rate of return on your funds.

Making regular contributions also means you can benefit from compounding, as well as managing any market volatility. In addition, some employers will offer to match contributions if you increase yours, so make sure to check if your employer does so.

5. Mind the gender pension gap

The gender pay gap still means women earn on average less than men in their careers, so it’s even more vital for women to engage with pension savings early on. Family obligations may also mean they take more career breaks and often work part time: all factors that may leave women with significantly less in their pension pot by retirement. The Pensions Policy Institute found that women in their 60s have £100,000 less in their pension than men of the same age. While some of the drivers of the gender pension gap will take time to solve, taking an active role in saving for retirement from an early age will go some way to closing the gap.

If you would like to learn more about pensions and retirement planning, contact us to speak to one of our financial planners.