Workplace pensions are a great way of saving for later life because you get a contribution from your employer and from the government in the form of tax relief on the money you pay in.
Five workplace pension questions you really need to ask
No matter how far away your retirement may seem, it’s useful to know how pensions work so you can get the most out of yours.
Here are five things you need to know:
1) How much should I save in my pension?
The minimum set by the government for those in auto enrolment pension schemes is 8% of earnings but many experts believe this isn’t enough for a comfortable retirement unless you have other sources of income too. Many experts think 15% is a more reasonable figure and there’s a generally accepted rule of thumb that if you start later in life you should increase the percentage to half your age. So if you’re 35, save 17.5%. If you’re 40, save 20% and so on.
2) How much will my pot be worth when I retire?
The value of your pot depends on four things: how much you pay in, how your investment funds perform, how much is taken out in charges and how long you wait before you start taking your money out.
3) When can I take my pension money out?
Pensions are designed to provide an income when you stop working, so for most schemes you can’t take anything out until you reach 55. That’s going up to 57 in 2028 and it will quite likely go higher in the future. You don’t have to stop working to take money out and you don’t have to take your money out when you stop working. The longer you leave it invested, the more it can grow, and the less time it needs to last.
4) What are the options for taking my pension money?
You can pretty much do what you like with your pension money:
• Take it all as cash in one go
• Buy an annuity to pay you a guaranteed income for life
• Leave it invested and take a regular income from it
• Take cash lump sums as and when you wish
• A combination of the above
The first 25% is usually tax free but the remainder may be subject to income tax, so you need to be careful to keep your tax liability to a minimum. The less tax you pay, the longer your money will last. If you can, it makes sense to use the tax-free cash element to minimise the amount of tax you pay on the remainder.
5) How do I choose the best funds to invest in?
Most workplace pension schemes have a default investment option. This is where your money will be invested unless you choose otherwise. It’s usually chosen by your employer and their advisers to be suitable for most members. Typically it will offer the potential for long-term growth coupled with a moderate level of risk.
However, if you’re a bit more adventurous or retirement is a long way away, you might want to choose something a bit higher risk but with a greater potential for growth.
Or if you’re more cautious or near to taking your money out, you might want to choose something a bit lower risk to reduce the chances of a sudden fall in value because of a stock market crash.
Your scheme documentation will explain the other funds you can choose from.
Your pension is just one click away
Finally, one top tip. Do your pension the way most people now do their banking – online. All the top companies provide secure online account management so you can monitor the progress of your money and make sure you’re on track for the retirement you’re hoping for.
The value of your investment is not guaranteed and can go down as well as up. Tax and allowance figures are as at April 2019. Tax rules can change and what it means for you may depend on your individual circumstances.
Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.