If you’ve set up a pension plan or had one set up at work but haven’t really paid it much attention yet, you might not know how exactly it works, what it can offer or how to maximise its benefits. But give us five minutes and we’ll bring you up to speed with seven numbers that really count.
Here’s the good news. The number of people taking up pension plans to save for their future is on the rise. Since employees started being automatically enrolled into pension schemes in 2012, the number of employees in workplace schemes has risen from 2m to more than 21m. That means 90% of workers aged 25-54 had a pension plan in 2020.
What’s so good about a workplace pension scheme is that your employer is contributing to your future too (a minimum of 3% of your qualifying earnings) and the government gives you a tax break on your payments called ‘tax relief’, which can give your savings a further boost.
Some employers choose to pay more than the minimum and others will pay more into your pot if you do – known as matching.
If you’re eligible and it’s suitable for you, but you haven’t joined your workplace pension scheme, or you’re not taking full advantage of what you’re entitled to, you could be passing up on what is effectively ‘free money’.
The not so good news is that a lot of young people admit that they’re not very engaged with the pension plan they have. Only 6% of 18 to 24-year-olds are ‘highly engaged’ according to a study by the Financial Conduct Authority (FCA). In the same age group 42% describe their engagement as ‘very low’ and it’s the same for 30% of 25 to 34-year-olds.
This lack of engagement and understanding can mean people aren’t aware how much they need to save for their future, and that could lead to people not having enough for the retirement they want.
One of the great things about a pension plan is that any money paid in by you or your employer is invested on your behalf. The FCA study found that 29% of people with a pension plan didn’t realise this, and that figure was as high as 45% among 18 to 24-year-olds.
What this means is that it will have the chance to grow and hopefully beat the rate of inflation, which rose to 1.5% in April 2021. You should bear in mind that as a pension plan is an investment its value can go down as well as up and you could get back less than what was paid in.
Where you choose to invest could make a big difference to your future. Some people like to review and choose their investments while others are happy to leave these decisions to investment managers. You should think carefully about how involved you would like to be. Our Investing – DIY or delegate? guide can help you decide which approach is right for you.
Why is it important to review the value of your pot? Well, saving for your future is a long-term goal. The sooner you start, the longer your money is invested and has the potential to grow.
But having made a start, it’s also really important to know what you’re aiming for and whether you’re saving enough to achieve that. The earlier you know whether you’re on track, the longer you will have to change things if it looks like you might be falling short of what you want. Which brings us to our next figure …
Despite the success of auto-enrolment the government still thinks as many as 12million people could be under-saving for their retirement – that’s more than a third of the working age population.
When you have a pension plan in place, especially through your work, it’s easy to stay in the habit of saving because payments usually come straight from your salary. But you’ll need some help to understand what your regular payments now might mean for your lifestyle in 30 or 40 years’ time.
That’s where tools like our pension calculator can help. With just a few basic details you can see how much money you could have in your pension pot in the future.
Increasing the amount you put away even just a little each month could make a big difference to your pension pot in the long run. If you do decide you want to pay more into your pension plan, you can usually do this by increasing your regular payments and/or by making one-off payments, but check what your options are with your provider or employer. Standard Life customers can do this online or via our app.
If you’re wondering how your new State Pension fits into your plans then you need to know how much you can expect to get, and when.
Currently if you’re eligible for the full new State Pension you would receive just under £9,400 a year. That’s less than a minimum wage salary and is unlikely to be enough to give you what you want or need to live off when you come to retire.
The amount of State Pension you receive is based on the number of years of NI contributions you have paid or been credited with and when you start claiming it. You can check your State Pension forecast online.
On its own, the full amount would only cover a basic lifestyle and, because it only starts in your late 60s, it won’t help support you if you want to retire earlier. So it should only be a part of your overall retirement plan. You can check your own State Pension forecast on the government’s website.
One last figure to consider is the number of pension plans that are ‘lost’ or have been lying dormant – an estimated 1.6 million pots worth as much as £19.4bn. If you’ve changed jobs a few times, gathered a few pension plans and think you might have lost track of one or more, there’s a government website to help you track them down.
If you’re finding it complicated having several pension plans on the go and are considering combining them into one, you can consolidate with Standard Life but read our article Combining pensions. What you need to consider before making any decision.
A pension is a long-term investment. Its value can go down as well as up and could be worth less than was paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.