Pension Advice

After years of hard work, taking retirement or deciding to work less is a time when you can enjoy what the world has to offer, with the help of money you have saved along the way. Having a pension allows you to save for those special moments after your working life has ended, making all those years of 9 to 5 seem totally worth it.

What is a Pension?

Think of a pension scheme as a way of saving – you put a percentage of the income that you have earned during your working life aside, so you can still have an income when you aren’t working. Your pension can be set up through a scheme with the company you work for, or you can set it up on your own accord.

There is not one pension scheme that everyone signs up to and how your pension works will depend on the specific scheme you sign up for; a defined benefit, a defined contribution scheme or automatic enrolment.

Defined Benefit Pension Scheme

This particular scheme means that once you reach the retirement age, you will receive a specified income which is worked out by the salary you earn and your length of service. You can contribute to the scheme, but your employer will also pay contributions on your behalf.

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Defined Contribution Pension Scheme

A defined contribution scheme means that whatever you pay in during your working life is invested and then you will receive the final amount when you withdraw your pension. Only you will make payments into the fund, unless you are on a works pension scheme, then your employer can also make payments. The final amount of money you receive will depend on the amount that was originally paid in, the performance of the investments and any charges you incurred.

Automatic Enrolment

This scheme is a Government initiative brought into action in 2012 to help more people save for retirement. All employees are automatically enrolled into a workplace pension scheme by their employment unless the employee chooses to opt out. You will automatically be enrolled into the scheme if you:

    • Work in the UK
    • Are 22 years old
    • Earn more than £10,000 a year
    • Have not already reached state pension age

It should be noted that there is a minimum amount that can be contributed every year by you and your employer. Since 2018, the minimum has increased to 3% from you and 2% from your employer and in April 2016. It should be noted that these figures are set to increase further. The minimum contribution applies to anything you earn over £6,032 up to a limit of £46,350 (in the tax year 2018-19).

If You Decide To Opt Out

As mentioned previously, there is an option to opt out of the workplace pension scheme. If you want to opt out, then you will need to ask your employer for an opt out form. If you have opted out within a month of being enrolled on the scheme, then the amount that has been taken for your pension will be refunded back to you. If you decide to opt out after a month of being enrolled on the scheme, then the money that has already been taken out will remain in your pension fund that will be released when you retire.

If you are early in your career then opting out may seem like a good idea, but it’s worth remembering that the earlier you start saving, the more you will have to spend when you hit retirement. If you choose a defined contribution pension scheme, opting in from the start means you will have many years for the money you save to grow through investments.

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