All About Pensions
While pension-talk may seem like a really boring topic, it’s worth familiarising yourself with the basics so that you can make the best choice for your own personal circumstances. After doing a bit of research, you might feel inspired to set up a private pension, or you may decide that paying into a workplace pension isn’t for you.
It’s all about weighing up the options, knowing the facts, and making decisions that your future self will thank you for.
Pensions can be complicated and confusing, and the last thing you want is to have to pick through mindboggling, headache-inducing jargon. With this in mind, we thought we’d get started with something a little more light-hearted. We’ll build up to the more official stuff later!
Five interesting facts about pensions and retirement:
- The first ever UK pension was introduced on January 1st 1909. People aged 70 and over were entitled to between 10p and 25p per week, but only if they were deemed ‘of good character!’
- In 1940 - in response to a campaign by unmarried women in the 1930’s - the State Pension age for women was lowered to 60. The State Pension age for men was 65. This remained the case up until 2010.
- Currently – as of August 2023 – UK residents have an average of £61,897 in retirement savings.
- In 2019, the average retirement age in the UK was 64 for women, and 65 for men.
- In 2021, it was reported that then 10-year-old Pixie Curtis may become one of the youngest people in the world to retire. Alongside her mother, Pixie owns toy shop Pixie’s Fidgets, which generated over $140,000 of profit in its first month, and saw products sell out in just 48 hours.
What is a pension?
A pension is a way to save money for your retirement.
While you could theoretically retire at any age – income depending! – there may be certain limitations around when you can withdraw money from your pensions.
Different types of pension
1. State Pension
Many people in the UK will be able to claim a State Pension from the government when they reach a certain age.
There are currently two types of State Pension: basic, and new.
The basic is available to anyone who reached State Pension age before 6th April 2016.
Anyone reaching State Pension age either on or after 6th April 2016 will be entitled to the new package.
Everyone qualifying for the basic has now reached State Pension age, so we will be focusing on the new State Pension criteria in this blog.
Am I eligible for a State Pension?
In order to claim State Pension, you will need to have done at least one of the following for a minimum of 10 years (these do not need to be consecutive years):
- Worked and paid National Insurance contributions;
- Received National Insurance credits during a period of unemployment or illness; or
- Paid voluntary National Insurance contributions (this may be done to fill any gaps in your National Insurance record).
You may also be entitled to some State Pension if you have lived abroad, or if you have ever paid married women’s or widow’s contributions at a reduced rate.
When can I claim my State Pension?
This will depend on when you were born.
- Both men and women born before 5th April 1960 can claim their State Pension from the age of 66.
- For those born after 5th April 1960, the State Pension age will increase to 67 as of 6th May 2026, and eventually to the age of 68.
How can I claim my State Pension?
You can claim your State Pension here.
You should receive a letter containing an invitation code within three months of you reaching your State Pension age.
Alongside the invitation code, you will also need:
- Your bank or building society details;
- The date of your most recent marriage, civil partnership or divorce; and
- If applicable, the dates of any time spent living or working abroad.
If you have lost or not received your invitation code, you can request one here.
When will I be paid?
Once you have made your claim, you should receive a further letter, which will detail your payments. Your first payment will be issued within five weeks of you reaching State Pension age.
Your State Pension will generally be paid every four weeks. The last two digits of your National Insurance number will determine which day of the week you will receive your payment.
|Day of the Week
|Last Two Digits of NI Number
How much money will I get in my State Pension?
How much you are entitled to depends on your National Insurance record.
The full State Pension amount is £203.85 per week, although you may get more if you delay your claim.
You can check to see how much State Pension you could receive and when you may be able to get it by using the State Pension forecast on the Gov.uk website. You will need your Government Gateway details to hand to use this service, or you can sign up to create an account.
Can I continue working after State Pension age?
Yes, you absolutely can continue to work after State Pension age, if you choose to do so.
Your income will not affect your State Pension payments, and you will no longer be required to pay National Insurance. However, it’s important to remember that both your pension and wage will gain income tax.
You should also be aware that any money earned may affect your eligibility when it comes to other benefits, including Housing Benefit, Council Tax Support and Pension Credit.
If you opt to continue your employment, you may also be able to put forward a flexible working request. It is up to the individual discretion of the employer whether this is approved or not.
2. Workplace pension
By law, all employers must offer a pension scheme to their employees.
Both the employer and the employee make regular contributions to a Workplace Pension.
Am I eligible for a workplace pension?
Your employer is legally obliged to automatically enrol you onto a pension scheme if you:
- Are aged between 22 and State Pension Age;
- Earn over £10,000 a year;
- Are classed as a worker; and
- Usually carry out your job in the UK.
If you do not meet the criteria, your employer does not have to automatically enrol you. There are other reasons why you may not be granted automatic enrolment – you can check your full eligibility here.
Your employer is not obligated to contribute to your Workplace Pension if you earn the following:
- Less than £520 a month;
- Less than £480 over four weeks; and
- Less than £120 a week.
However, it’s worth noting that whatever the circumstances, your employer cannot refuse to enrol you. It is equally as important to remember that your employer is not allowed to encourage you to opt out of the scheme, or discriminate against you for joining.
When can I claim my Workplace Pension?
The age you can claim your Workplace Pension varies between providers.
Generally, the access age is between 60 and 65, although some providers may allow you to withdraw your pension as early as 55.
Any company that claims to help you to withdraw money from your Workplace Pension before the age of 55 is risking the possibility of you being taxed up to 55%.
How much money will I get in my Workplace Pension?
The overall sum in your Workplace Pension will depend on how much both you and your employer have paid in.
The minimum Workplace Pension contribution is 8%, which is usually split by the employee and employer. As an employee, you will generally contribute 5% of your qualifying earnings. Your employer will top this up with a 3% contribution. However, while this is the most common set-up, some pension providers may have different requirements.
As soon as you enrol, it’s important to know exactly how much both you and your employer are expected to contribute each month.
Can I increase my Workplace Pension contributions?
Yes, you can.
This can be arranged through your employer or directly with your pension provider. Your employer may even agree to increase their contributions alongside your own.
What happens if I leave or change my job?
In the UK, people will change their job an average of 12 times in their lifetime. That’s potentially a lot of pensions to keep track of!
It’s handy to keep any paperwork sent to you by your pension providers so you have a record of the various account numbers and company contact details.
When you leave or change your job, you may choose to leave any existing Workplace Pensions as they are. The money will remain in the pot, and you will be able to claim this once you reach the age stated by your provider.
Alternatively, it might be possible to transfer your previous Workplace Pension into your new one, or into a Private Pension.
3. Private pension
A private pension – also referred to as a personal pension - is a pension you have set up for yourself. You have the freedom to choose the provider and how much you contribute.
Again, the age you are able to withdraw your pension money will vary between providers, but it is generally 55.
You can compare private pensions and any associated fees for free on the Money.co.uk website.
What are the pros & cons of paying into a pension?
- Paying into a Workplace or private pension may give you increased financial security for your retirement.
- Employers are required to contribute at least 3% to their employees’ Workplace Pension. This means you are essentially receiving additional money from your employer.
- Your pension contributions usually qualify for tax relief.
- The State Pension age may change. If you have additional pensions that can financially sustain you until you are able to claim your State Pension, you could retire before you reach State Pension age.
- The government also contributes to your private pension in the form of tax relief. For every £100 you pay into your pension, the government will contribute a further £25 (capped by an annual limit, which is either 100% of your salary, or £60,000 – whichever is lower).
- If you’re in a position where you’re struggling financially, it can be difficult to watch a percentage of your wage disappear into a pension scheme every month. This may especially be the case if you’re young, and retirement feels a long way off! It might seem somewhat unjust that we are investing in our futures without actually being able to afford to live in the present.
- Without dwelling too much on the morbid possibilities, you might pass away before you are able to claim the money paid into your pensions. On the other hand, if this unfortunate situation does occur, your pension may be paid to your dependents, spouse, or partner.
When is the best time to start paying into a pension?
Whether it’s ticking a few places off the bucket list, or simply taking some much-deserved time out to relax and unwind, many of us already have grand plans for our retirement.
The last thing any of us want is to find ourselves in financial hardship when we retire. After working hard for so many years, retirement is finally time to take life at a slightly slower pace and enjoy the finer things without the stresses of working, commuting and living by the clock.
Many people consider pensions to be an investment for their future, and say that it’s never too early to start making contributions. Every payment, no matter how small, adds up – even more so with a Workplace Pension if you factor in employer contributions.
In principle, the earlier you invest in a pension, the more money you may have to put towards your retirement.
Of course, when and how much you choose to pay into a pension is completely up to you. You have to do what’s right for your own personal financial situation.
The good thing about pensions is that you can change your mind and opt in anytime, so even if you’re feeling the heat of financial strain at the moment, there’s no reason why you can’t start making contributions six months or a year down the line.
Representative example: Amount of credit: £1000 for 12 months at £123.40 per month. Total amount repayable of £1,480.77 Interest: £480.77. Interest rate: 79.5% pa (fixed). 79.5% APR Representative. We’re a fully regulated and authorised credit broker and not a lender