Paying into a pension is a good start in making sure you’ll have enough saved to retire comfortably – but there’s more you can do. Here’s a step-by-step guide to getting pensions savings under control.
Pensions are long term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply.
Auto-enrolment legislation in the UK has ensured that the vast majority of Brits are saving something for retirement. But minimum contributions alone are not sufficient for most people to secure a comfortable retirement.
Once you’re paying into your pension fund, there are still important steps you can take to make sure you’re saving enough and are on track to secure your financial future. Here are the key steps to manage your pension and what you should do with it when you retire.
Knowing where you stand is the most important first step towards planning for retirement. There are several elements to consider. You want to work out exactly how much is saved in all of your pensions – and you may have several, particularly if you’ve moved jobs frequently. Another important element is to work out whether you’re on track to get the full state pension.
With any workplace defined contribution (DC) scheme, the provider should send you an annual statement each year that tells you how much you have saved in your pension. This will also typically include a projection letting you know how much it will be worth when you reach retirement age.
Your annual statements will also show how your pension has performed over the last year, including an individual breakdown for each investment in your pension.
Most people have multiple pensions, so it’s important to make sure that you have details for all your retirement pots. If you’ve moved house and jobs, your pension provider may have lost track of you, so make sure you update all of them with your new address.
Private pensions are also usually DC schemes. Some of these will send you an annual letter, just like their workplace counterparts, but many platforms are increasingly focused on digital communication. This might mean you need to log in online to see what you’ve got stashed away. Make sure you keep your login details and passwords safe and secure.
If you’re part of a defined benefit (DB) or final salary scheme, you should also get an annual statement. DB schemes work differently. With these schemes, the amount you get at retirement is based on your salary and length of service, not what you’ve saved or your investment returns. Your provider should outline what annual income you will get when you retire, and how this will rise with inflation.
The full state pension is currently worth £203.85 a week, but it’s due to rise by 10.1% in April 2023. To qualify for the full amount, you need to have 35 years of National Insurance contributions. You need to have a minimum of ten years of contributions to be eligible for any kind of state pension.
If you’ve got gaps in your record, you might be able to buy additional years in the run-up to your state pension age to make up the difference. Equally, if you can’t work for various reasons, such as being a carer or a stay-at-home parent, you can get NI credits towards your state pension.
You can check your national insurance record on the government’s website.
If you have a defined benefit pension, you’ll be told each year in your annual letter what your annual income will be at retirement. If you stay with the company, the amount should continue to go up each year. This is a promise, rather than a prediction, so it’s very easy to understand what you’ll get and plan accordingly.
With the state pension, it’s easy to see if you’re on track to get the full amount, but harder to know what it will be worth. Generally, the amount goes up each year. In the past, state pension payouts have been protected by something called the triple-lock, which meant that the amount rose by inflation, earnings or 2.5% – whichever was highest. However, the UK government broke the triple-lock during coronavirus, and there is no guarantee it will be honoured in the future.
It’s extremely hard to predict exactly what your defined contribution pension pot (whether workplace or private) will be worth, as investment results are not set in stone. Some pension companies will show you an estimate of how much your pension fund is likely to grow when you reach your retirement age. If your statement does not show this, you can call your pension company and ask for an estimate over the phone.
Bear in mind that this is just a prediction, investments can be volatile, and it’s impossible to know exactly what returns you will get. As a rule of thumb, many asset managers predict growth of around 5% for long-term investments but of course, your fund could do much better or worse over time.
Once you have predicted values for all your DC pensions, you need to work out what that means in terms of annual income. One simple way to do this is to estimate how many years you need your pension to last and divide the total amount by that number. You could also use an annuity calculator to see what sort of guaranteed income for life you can buy with your funds. If you decide to do drawdown and stay invested, your money could last longer and have a higher annual yield as it will continue to grow.
Finally, you need to add up the annual income from your state pension prediction, any DB payouts and all your DC savings. This will tell you how much you’ll have to live on each year.
Think about how that compares to your current salary and whether you think it will be enough. Typically, experts say you want between 50 and 75% of your annual salary in income when you retire. If you’re renting or are still paying off the mortgage, you might need more.
If you have a significant shortfall, you’ll need to contribute more or delay your retirement.
There are several reasons you may decide to change how much you contribute to a pension, including:
You get a pay rise and can afford to contribute more
You’ve done your sums and you need to increase your contributions to have a comfortable retirement
Your company scheme offers to match your contribution, so you get free money from your employer by saving more
It’s tax-efficient because saving more reduces the amount of tax you pay.
Of course, you may also need to reduce contributions, for instance, if you have significant debts or your income decreases substantially. Generally speaking, you should avoid dropping pensions contributions if you can, and opting out altogether should be a last resort.
If you’re auto-enrolled, you should be paying in at least 5% (although some of that is made up from tax relief) and your employer will be paying at least 3%.
If you’re in a DB scheme your employer will be contributing a substantial amount towards your pension. You may also have to contribute, and these payments qualify for tax relief. DB schemes are extremely generous, so staying in the scheme is always the best course of action.
Some private pensions may have rules around minimum and maximum contributions. Check with your provider to see what’s allowed.
You can only save as much as your total salary or £40,000 (rising to £60,000 from April 6, 2023) – whichever is highest – and still qualify for tax breaks. There's also currently a lifetime savings allowance of £1,073,100, but this is being scrapped in April 2023. If you breach these figures, you’ll have to pay significant charges in tax.
You might also be bound by something called the Money Purchase Annual Allowance (MPAA). This comes into play once you have “cracked open” your pension pot and started to withdraw funds. As soon as you do this, the MPAA severely curtails the amount you can save tax free. In a nutshell, once you’ve accessed your pension, you’re only allowed to contribute £4,000 a year – rising to £10,000 after April 6, 2023 - anything above that amount will be taxed at your marginal rate.
Withdrawing from your pension is a complex process because the different types have different rules. Typically, you can access DC funds from 55 – though this rises to 57 in 2028. Your state pension age will usually be between 66-68, though these ages are likely to continue rising. DB access will depend on the scheme rules, but 60, 65 and state pension age are all standard options.
Some schemes might allow you can take money from your pension early, but there are usually charges and taxes deducted so speak to an independent financial adviser before doing this. (If you’re terminally ill, you can usually access your cash without penalty.)
On the other hand, leaving your cash where it sometimes means you’ll get a higher income, for instance, if you defer your state pension. If you’re planning to work longer, consider putting off accessing your money until you need it.
No, you can continue to work after you start withdrawing from your pension if you want to. However, if you continue to save into a DC scheme, you may be subject to the Money Purchase Annual Allowance?
It means you have decided to take your pension at a later date than the retirement age chosen when you set up your private pension or the state pension age set by the government.
If you defer your private pension, then you can continue to pay into it after you have reached your chosen retirement age.
Your DC pensions will go to the person you nominated when you set your pension up.
If you contact your pension company, they can help you:
Find out your nominated person
Change your nominated person
Your beneficiary will not have to pay inheritance tax but might have to pay income tax. The precise rules depend on how old you are when you die, and the type of scheme you have. The government lays out all the details in this handy table.
Some DB pensions have valuable spousal or dependents benefits, which means your husband, wife or even sometimes child could start receiving a percentage of your pension once you die.
Some pension companies restrict who you can choose as your nominated person to a close family member, such as your husband, wife or child.
If you think you paid into a pension with an old employer, you can contact the pension scheme or even the company itself to find out.
Use the database on the gov.uk website and search for the employer's name to find the pension scheme details.
You can ask for your lost pension details to be sent through the post, then you can choose what to do with it.
You can leave it where it is, transfer it to an existing pension or start withdrawing it if you’re at retirement age.