First steps in saving for retirement at work
1. A workplace or occupational pension is one you can only get through your employer. You put money into the scheme every month and your employer does the same. When you retire, you can use it to get an income. Simple.
2. Or not so simple … There are two main types of scheme. If you work in the public sector (NHS, local council etc) then you’ve probably got a final/averaged salary or defined benefit pension. Private sector workers are more likely to have a money purchase or defined contribution pension. This last includes auto-enrolled pensions and NEST (the National Employment Savings Trust).
3. With a defined benefit (DB) pension, your income retirement is based on how much you earned while working and how long you were in the scheme. The calculations use either your final salary or your pay as averaged over your career.
4. When you retire, you’re paid an income for life – and your spouse should get a pension too if you die before them. You’ll also be able to take a cash lump sum tax-free, although that will reduce your retirement income. Typically, the retirement age is 65 but you might be able to take it earlier.
5. Defined contribution (DC) pensions are very different. You (and your employer) regularly pay in an agreed amount to build up a pension pot for you. Like a personal pension, the pot is invested in shares, cash and other investments and is usually run by an outside insurance company. When you retire, you use the pot to sort out your own retirement income.
6. DB schemes are often called ‘gold-plated’ because your retirement cash is pretty much guaranteed by your firm, the government or ultimately the government’s Pension Protection Fund. With DC plans, what you get at the end depends on how well the stock market has done by the time you come to cash it in. That, sadly, is not guaranteed.
7. It used to be the case that, with the money from DC schemes, you had to buy an annuity (an income for life). New rules mean that is no longer necessary and you can access your pension from age 55. Don’t spend it all at once: you could be retired for 30 years and that money has to last ...
8. Outside the public sector, DB schemes are being phased out because they are very expensive for employers to run. New savings are likely to be put into a replacement DC plan with less favourable terms.
9. Nonetheless, it’s sensible to save into a work place pension because you get extra money from your employer and tax relief on your contributions. For a basic rate taxpayer, a £100 pension contribution only costs £80 (higher rate taxpayers can reclaim the extra 20% or 25% through their tax returns). Remember though, pension income is taxable once your income exceeds your personal tax-free allowance.
10. Pensions aren’t the only way to save for retirement, especially as there are caps on how much you can put away. You can save money into an Individual Savings Account (Isa) too – from which any income you take is tax-free.
- For an indepth explanation of pensions, go to www.pensionsadvisoryservice.org.uk.
- There’s more details about NEST at https://www.nestpensions.org.uk/
- Help on choosing a pension is at https://www.citizensadvice.org.uk/debt-and-money/pensions/starting-a-pension/choosing-a-personal-pension/.
Last updated 22 August 2017.