Pensions are changing again – and it’s good news

Pensions

Jamie Jenkins

22nd March 2019 at 11:26am

Some of you reading this will be wondering how pensions can be changing again, but trust me; this one is helpful, and it’s important.

Changes to workplace pensions from this April mean the minimum you and your employer need to contribute goes up.

And it’s good news if you’re saving this way – here’s why.

While on the face of it you end up with less take-home pay today, a much better way to look at it is that it’s deferred pay. You and your employer are putting more money away now with a view to you being able to enjoy more in the future.

So how much are we talking about? If you have a workplace pension and you’ve been paying the minimum three per cent of salary, and your employer two per cent, these go up to five per cent and three per cent respectively. It means eight per cent of your yearly salary will be paid into your pension and invested for the kind of future you want.

However, because some schemes work things out based on a band of earnings, rather than full salary, it can sometimes be less than eight per cent. Do speak to your employer if you’re unsure.

Some employers have already chosen to pay more, and some offer matching schemes; the more you pay, the more they pay. If your employer is this generous, you should seriously consider taking advantage of what they offer.

And then there are tax benefits. You get tax relief on what you save into your pension based on the rate of income tax you pay. No other way of saving gives you these tax advantages and an employer contribution.

10 million have joined workplace pensions so far

It’s not just us who thinks this is a very good thing. Since 2012, over 10 million people have been enrolled by their employer into a UK workplace pension and fewer than 1 in 10 have chosen to opt out. In fact, most employees are now saving for their retirement this way.

It’s your money, invested – normally in funds – and owned by you, which you can usually start to access from age 55, although this may change in future.

You can normally take some or all of your pension pot with one quarter (25%) usually tax free if you’re in a modern, flexible pension. Or set up a guaranteed income for life from an annuity, or a mix of these. Or you can leave those savings untouched for as long as you want, so they have the potential to keep growing.

If you want to, you can usually choose where your workplace pension savings are invested. Perhaps you have ideas of your own as to how much risk you want to take for the returns available, or you simply want to ensure your money is being invested in companies that better reflect your values. The choice is yours.

Compare that to the State Pension, a hugely valuable benefit which most working people will get. You have to wait until your mid- to late-60s to get it – and take it as an income.

Yes it provides a solid foundation for people in retirement, but it doesn’t give you any flexibility. You can read more in our State Pension – what do I need to know? article.

So the combination of State Pension and workplace pension savings will give you some certainty as well as the flexibility around the income you might need in retirement.

There are many people retiring now who say they wish they’d saved more for their retirement when they were younger. Today, thankfully, people are nudged into saving by their employer while they are working.

With all the pressures on people’s income in today’s society, it’s understandable that putting money to a retirement that might be decades away can seem, well, a bit too far off in the future…

One thing is certain. I’ve yet to meet anyone retiring now who regrets having saved.

A pension is an investment and can go down or up and may be worth less than what was paid in. It’s important to note that laws and tax rules may change in the future and your own personal circumstances will have an impact on tax. This article shouldn’t be taken as financial advice and is based on our understanding in March 2019.