Your Pension Really Does Matter, Here's Why
I hear it all the time at work, “My pension doesn’t matter”, “I’d rather have the money now”, “I will sort it out closer to retirement”. Your workplace pension in the UK is your retirement fund that you’re looking to live off in the future, but being young doesn’t mean you don’t have to contribute to your pension until you’re older, you should be doing it now.
In the UK every employer must automatically enroll you into a workplace pension if you are working for a company and are age 22 or over. You also need to be earning at least £10,000 a year for it to be law binding for your auto-enrollment, although employers may enroll anyone on their payroll in order to simplify things. You can opt out of the workplace pension if you so wish but every so often when the company performs a pension audit if you still meet the legal requirements for auto enrollment you will be re-enrolled into the company workplace pension, this varies with each company.
At the time of writing the minimum contributions as a % of your base salary are 3% for the employee and 5% for the employer meaning that a minimum of 8% of your wage is added to your pension pot over a tax year period.
What Exactly is a Workplace Pension?
Your workplace pension is usually deducted from your salary before tax is deducted, meaning than any money you place into your pension via salary sacrifice won’t be taxed. If you pay into your pension separately then you will receive tax relief from the UK government into your pension pot, replacing the tax that was deducted.
So what actually happens to the money? And why is it important? Well your money will usually be deposited with a pension provider such as Legal & General or Aviva, these companies are good examples of providers that hold your pension money until you are ready to take the money out at retirement age. Different pension providers do different things with the money they hold so it’s always a good idea to check where your pension contributions are and what is happening to your deposits. Most providers offer online portals where you can see your deposits and calculate how much money you can expect to be in your pension pot when you hit retirement age. These calculations also show you your predicted retirement date unique to you and how long you have left.
If you leave your job then your pension pot stops getting paid into, you won’t be able to access this money until you’re at retirement age still, so there’s no getting the money out if you decide you need the money. Your pension provider is separate to your job so even after you leave you should be able to check up on the value of the pension pot. Alternatively you can transfer pension pots to a new provider with your new employer if you so wish, this stops you having multiple pension pots that you need to keep track of.
Having a Workplace Pension is Investing
That’s right, your pension pot is most likely being invested into a fund created by the pension provider. Usually pension providers choose aggressive investments with higher risk at a younger age and as you get closer to retirement they move your investments into more stable and less risky portfolios. So, did you know you were investing? Chances are, no. Most people who don’t know about investments don’t realise that their money is being pumped into the worlds economy in the hope of a much better return when you retire, this way you don’t have less money than you can live on when you retire. For example at my previous 2 jobs the funds are still in their accounts and are still being invested, and growing too. One is up £800 on my initial deposits and the other is up £1,230, meaning that although I no longer work for those companies, my money is still growing and working for me. You need to have a look at the associated fees with your pension provider as companies usually get a really good rate for having all of their employees with that provider, so it may be worth leaving the funds where they are for a little while.
If you’re looking to gain on compound interest on your pension contributions then you will want to always transfer your fund balances to your current workplace pension. This means that all of the gains continue to grow on your previous gains. Gains on gains. Building a great retirement portfolio needs only investment and time to grow, so log into your pension provider and see what’s going on.
How Can You Improve Your Pension Potential?
Many employers have an additional benefit agreed with your local workers union on additional contributions. In my workplace for example if I increase my pension contributions to 7% then the company will also match 7%, this means that 14% of my salary, tax free, is being added to my pension every month. That’s an extra 7% from the company into your pension pot, that’s free money! Free money in this day and age is hard to come by, so if your employer has benefits like this then it’s worth logging onto your employee portal and changing it to the highest matched contribution. You’ll be glad you did it when your older, which brings me onto my last point.
Many people think that at a young age they have better things they can do with the money, use it for fuel, buy a new car, get finance on that tasty new PlayStation 5. Whatever the excuse, you need to understand that in the grand scheme of things 3% is not a lot, putting the minimum amount in every month is a start and it’s better than nothing. You shouldn’t wait until your 10 years off retiring before you increase your contributions. The older generation are having to add even more, most of the time unmatched just to boost their after working life potential. If you’re working full time and are enrolled onto a workplace pension don’t opt out, because you’ll pay for it later.
Self Employed and State Pension
If you’re self employed you can still have a pension, there are lots of providers that offer a private pension for individuals looking to save for their retirement with many different types of investment options you can chose from. Have a look into some providers that can offer you this service, I can’t recommend any as I don’t have a personal pension so you’re on your own here, get researching!
If you are employed then chances are you pay National Insurance contributions out of your payslip, National Insurance helps pay for government benefits such as maternity leave and bereavement support, however it also contributed towards your state pension. Your state pension is defined by how many years you have contributed to your National Insurance and the government will pay out this state pension at retirement age based on years and contribution value. You can’t rely on this as it’s going to change a few times before us 20 and 30 year old’s get there, so plan ahead with your workplace pension. You need to be looking at around 30 years of NI contributions throughout your working life, if you have gaps where you didn’t pay any NI then you can voluntarily add money to your contributions to fill in the gaps towards retirement. You will need a Government Gateway ID in order to do this with the .gov website.