Planning for the future gets a lot easier when you understand how savings and investments like pensions work. And if, like most people, you have a few questions, don’t worry. Here are some of the big ones many people are asking – along with some answers.
1. How does a personal or workplace pension work?
A personal or workplace pension is a way of saving to give you an income when you give up work, or want to work less.
And to encourage people to save into a pension, you normally get tax benefits on what you pay in.
So, if you’re a basic-rate taxpayer, every £100 you save into your pension costs you just £80. Higher and additional-rate taxpayers save more on tax under current tax rules, though this could change in future.
If you’re in a workplace pension your employer normally pays in too and some even match some or all of what you contribute. It’s money you’re entitled to – so think of it as part of your pay you wouldn’t want to miss out on.
The money in your pension is invested, usually in funds. With funds, your money is pooled with other people’s money to buy a range of investments, such as stocks and shares, and bonds, giving it the potential to grow in value. Because it’s invested though, you need to understand that the value can go down as well as up and could be worth less than was paid in.
These days, you can start to take your pension pot how and when you want, currently from the age of 55 (although this age may increase in future). You don’t have to, and just because you can doesn’t mean you should – you can leave your money invested with the potential to keep growing over time.
Once you’re taking money from your pension, it’s treated as taxable income, but the good news is that you can normally take the first 25% tax free. You can take this as one lump sum or in stages when you choose – as long as you have the type of pension that lets you do this.
You can still set up a guaranteed income – known as an annuity – after you’ve taken your tax-free lump sum, if you want. This gives you a guaranteed income for life, or for a fixed period of time, although tax rules may change in future and depend on your own circumstances.
If you’re getting to the point when you’re considering how to take money from your pension, the Money Advice Service has a useful guide to taking your pension pot.
2. How does investing work?
When you invest your money, you’re buying a piece of something that could go up in value over time. And that means you could get back more than you paid for it when you choose to sell it, although there’s no guarantee.
Since investing gives your money the opportunity to grow, it can be a great way to help protect your money from the impact of inflation and help meet your long-term goals, such as giving you an income later in life.
The final value of your investments will largely depend on four main factors: how much you pay in, how your investments perform, any charges you pay, and how long you’re invested for.
Want to know more about investing? Read our article on the three golden rules of investing. Remember, the value of your investments can go down as well as up and you might get back less than was paid in.
Consider taking financial advice if you’re unsure about your options. If you don’t have your own adviser, you can find one in your area at unbiased.co.uk. Alternatively, you can visit the Standard Life website for more information about financial advice or 1825, Financial Planning from Standard Life (1825 is a trading name for the Standard Life Aberdeen group’s advice business). Please note there’s usually a charge for getting advice.
3. When can I retire?
There isn’t one answer to this, as ‘retirement’ means different things to different people.
“Retirement used to be a set milestone in life. But times have changed and it can be more fluid. There doesn’t need to be this ‘full stop’ to our working lives any more.
“In fact, on a practical level, it doesn’t make sense that there is,” says George Jerjian, ‘Retirement Rebellion’ blogger and coach at georgejerjian.com.
Many people admit they want to retire ‘early’. For some that will be in their 50s, for others it may be a year or so before State Pension age. If that’s what you want to do, there are some practical things you should think about first.
Getting an idea of how much you’ll need and how you’ll save for it probably top the list, whether that’s from savings, investments like a pension, or you have other income or get an inheritance.
So how much will you need is the big question? Helpfully, the new Retirement Living Standards from the Pensions and Lifetime Savings Association give an idea of how much you might need each year, covering the basics such as food and housing and some luxuries, including holidays, gifts and a car. Picture what your future could look like here.
And then look at how your own savings are doing – and how they could grow. If it’s your pension, you can see how much you could have in the future using our pension calculator.
As mentioned above you can normally access your workplace or private pension from the age of 55 – well ahead of the State Pension.
If you want to retire early you can work out when you can afford to do it by considering how much you’ll need to live how you want – and how long you need your money to last.
Of course, some people want to keep working, or set up their own business and take control of how they work.
“This can be a great way to find a sense of purpose in later life, and good for mental and physical health,” explains George Jerjian. “First think about what you have done in your career so far, what you have enjoyed the most, whether this was part of the job or a hobby. Then think about how that could be monetised.”
4. What about the State Pension – and when will I get it?
The State Pension is a regular payment made to you by the Government once you’re eligible. It’s a valuable part of your overall income later on.
Men and women are paid their State Pension at the same age, but that age is rising. The State Pension age will increase to 66 by October 2020. A further increase to 67 will be phased in between April 2026 and April 2028. And then a further increase to 68 is planned for between 2044 and 2046, however, there are proposals to bring this timetable forward.
If you’re not sure when you’ll be entitled to get the State Pension, check online at https://www.gov.uk/state-pension-age.
From April 2020, the new State Pension goes up from £168.60 to £175.20 a week. But it’s worth remembering that not everyone gets the same amount.
That’s because you need to have paid in, or had credited 35 years of National Insurance contributions to get the full State Pension – so it makes sense to check your details: www.gov.uk/check-state-pension
Your State Pension is taxable, just like your other pension income. You normally pay tax when your income is over the basic personal allowance – £12,500 for the 2019-20 tax year.
Tax and legislation may change. The information here is based on our understanding in March 2020 and shouldn’t be taken as financial advice.
Your own circumstances will have an impact on your tax treatment. A pension is an investment. Its value can go down as well as up, and you could get back less than was paid in.
Standard Life accepts no responsibility for the information contained in external websites referred to in this article. They are provided for general information only.