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Money Mondays: Everything you need to know about your pension

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Sarah Biddlecombe
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Money Mondays is your go-to guide for all the information you need to manage your finances. For this week’s Independent Woman’s Bank Account column, we asked a retirement expert to explain everything we need to know about saving for our pension.

It’s fair to say that the reality of being a pensioner can feel a long way off for many of us. Indeed, the age at which we will be eligible to claim our state pensions is steadily increasing: in 2010, women aged 60 were able to collect their pension packets. This year, though, the age is 65 – and by 2028 it will have risen to 67. Depending on factors such as life expectancy, this number could change again before we reach the official age of retirement.

But however far off retirement feels, it’s always good to be putting some money away for our pensions – whether that’s by contributing more cash with your employer under the Automatic Enrolment scheme, or saving into a personal pension. 

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Here, Jacqui Bateson, who works as a retirement specialist at Skipton Building Society explains everything you need to know about pensions, and offers some advice on how to start saving more money for retirement today.

The age of retirement will rise to 67 by 2029

What is a pension?

A pension is simply a long-term savings plan to help you put money away for your retirement, with favourable tax treatment compared to other types of savings. Pensions come in different forms. There is the state pension, which is paid to you by the government once you reach state pension age. Your employer may also offer a pension scheme, and there are a number of personal pensions you can open, which are particularly helpful if you are self-employed.

How does the state pension work?

The state pension is funded from your National Insurance (NI) contributions. The amount you receive doesn’t depend on how much you earn, but on your own NI record. If you entered the NI system on or after 16 April 2016, you will need to have paid qualifying contributions for 35 years to be entitled to the full state pension. For those who entered the NI system before then, there are transitional arrangements in place.

The state pension age for women has risen from 60 to 65, and will continue to rise alongside the pension age for men. If you have taken a career break or time off to care for dependents, your state pension may have been affected. It’s important to understand when you are entitled to your state pension and if you are on track to receive the full amount. The Pension Advisory Service website is a helpful source of information and has tools to help you to answer these questions.

If you have taken a career break, your pension might have been affected

How about an employer pension?

Automatic Enrolment is a government initiative to help more people save for later life through a pension scheme at work. By 1 February this year it became compulsory for all employers to automatically enrol eligible employees into a pension scheme, and to pay money into it.

Essentially, this is a long term savings account where you receive tax benefits from the government and your employer pays money in. This money is in addition to your salary and often increases if you agree to pay more in. If you have already signed up, congratulations - and why not just check if you are maximising the employer contributions? After all, free money doesn’t come our way often.

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And personal pensions?

A personal pension is simply a pension scheme which is independent of your employer. They also have tax advantages and are appropriate for those who are employed, self-employed or not currently working.

If you are unsure what pension provision you have in place, then there is no better time than now to think about whether that is going to be enough. If you think you may have ‘forgotten’ pensions from previous employment, the Pension Tracing Service can help you to track them down.

Personal pensions have tax advantages and can work well for those who are self-employed or not currently working

What can I do now for my retirement?

There are two things to consider when thinking about retirement: first, the amount of income you need to fund it and second, what your life is going to be like in retirement. These are really different things but as time passes they do start to converge, as the reality of the amount you have saved compared to your aspirations starts to become more real.

1. Start saving little by little, as soon as you can

There is so much happening now that needs attention and money: rent or a mortgage, family, holidays, eating out, the list goes on. But the younger you are when you start saving for retirement, the smaller the amounts you need to put away will be. These small amounts really will add up over time, so don’t limit your thinking about retirement - focus on the possibilities instead. You can talk to your employer and friends and family to find out what others are doing to give you some ideas.

2. Consider your income in retirement

The pot of money you have in retirement can come from lots of sources, in addition to your pension. Hopefully over the years heading to retirement you will have paid off your mortgage, and be sitting on a good-sized asset which can be used in a number of ways. First of all, once you own your home outright, you will have freed up the amount of your mortgage repayment. If you can do this ahead of retirement then this is a handy amount to bolster your retirement savings. And once you are retired, you will have a debt free roof over your head for life. This gives you choices in later life such as downsizing, or releasing money from your property.

You might also consider becoming a buy-to-let landlord, purchasing properties to rent out and ultimately providing opportunities for additional income in your retirement (assuming property prices have gone up!)

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Talk to your friends and family about how they’re saving for retirement, to give you some ideas

3. Consider continuing to work after you’ve retired

For many of us, there are opportunities to step away from our primary career and return to the workplace doing something else. The choices are endless - for example, you might decide to start up your own business doing something you love while also drawing from your pension. There has been an increase in recent years of people taking non-executive director roles in retirement, providing the opportunity to stay in the workforce without having to work full time. Some employers allow retired colleagues to stay on in different roles and, of course, you can simply go out and find a new job that suits your lifestyle.

4. And finally…

There’s a lot to think about and many ways to boost your retirement pot. From owning your own home, to pensions, savings and investments, it all adds up. Mindfully looking into it and taking a realistic view of your current finances, with a little prudent budgeting, really can go a long way. I’m not advocating you shouldn’t have fun or spend some of your money on luxuries, but consider where your money is going and perhaps put just a little more away for the future.

For more information on retirement and your pension, you can visit the government’s website here.

Images:  Unsplash, Thomas Hafeneth, Philip Veater, rawpixel, Getty, Samad Jble