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Your retirement might seem as though it’s a long way off, but the second best time to start preparing for it is today (the first best time is when you’re 22). It may not be the most exciting task – but it’s vital to make sure you’ll have enough to tide you over when you decide to retire. We’ve compiled some of the key details about pensions and the different types that exist – some of which you may already have. There are some great tax benefits to paying into a pension, which means that as long as you’re happy for your money to be tied up until you turn 55, it’s one of the most efficient ways to save.
Use the table below to compare pension providers by the minimum investment, the investments you can choose between and the fee for a £50,000 pension pot – this amount is a baseline – if you know how much you plan to invest in a personal pension then you should work out how much each provider will cost you and compare these fees.
Compare pension providers
Pensions are complicated products and whilst we’ve made every effort to compare the fees of these products as best we can, certain products will be more suitable for you based on the amount of money you have in your pot at the time of switching.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
What is a pension?
Put simply, a pension is a savings account for your retirement. You can get tax relief on your savings, making it a really tax efficient way to save.
Once you retire, you’re able to draw money from your pension or sell it in return for regular income for the rest of your life (also known as an ‘annuity’). Generally, you can access the money in your pension pot from the age of 55.
Something some people don’t know about pensions is that it’s invested – typically in a mixture of funds, stocks, shares and government bonds, which is how it grows over time. It’s not necessarily invested in all of these instruments, and as you get closer to your retirement your pension’s investments often change to make them less risky.
Pensions have a number of important advantages over other savings options, which encourage your contributions to grow over your career. These include:
- Tax relief
- Top ups from employers
- Tax free lump sum when you retire
There are a few different types of pension:
- Workplace pension. A pension set up by your workplace which your employer often pays into.
- Personal pension (sometimes called a “private pension”). A pension set up by you. You can also consolidate old workplace pensions into a personal pension.
- State pension. The pension you receive from the government at your retirement age.
Let us take you through each of these in a bit more detail.
Most of us have our first encounter with pensions at work. Employers are required to offer company pension schemes by law as of April 2017. A company pension scheme can be one of the simplest ways to put money away for retirement. It’s easy, and you’re often auto-enrolled with very little intervention required, if at all.
With workplace pensions, a percentage of your salary is put in each month.
The biggest benefit to a workplace pension is that your employer has to pay into it as well. The minimum amount your employer can pay in is 3%, while the minimum you can pay is 5%. Some employers might decide to pay a higher amount into your pension and might match your contributions up to a certain amount.
Your contributions are taken straight out of your pay before it even hits your bank account, so it’s easy to not miss it, and the income tax you pay is calculated after the pension amount has been removed, so you get full tax relief on it.
There are two different types of workplace pension – a type of a type of a pension, so to speak. An important distinction between them is whether the pension in question is a defined benefit(sometimes called final salary), or a defined contribution (sometimes called money purchase) pension.
These are largely funded by employers, with employees paying in sometimes. With a final salary pension, you’ll get a percentage of your final salary before retirement – or when you leave – as a regular income. The percentage is calculated based on the years you’ve worked at a company.
This is the most common type of pension. They save money into a pension pot under an agreement with your employer. When it comes to withdrawing, you can take the cash out or swap it for something called an annuity, which is simply an income for the rest of your life.
Auto-enrolment aims to make sure that people contribute to their pensions. The auto-enrolment rules mean employers are legally obliged to offer employees a pension scheme. If you do nothing, you’ll be opted in – hence the name. You can, however, choose to opt out if you wish.
When must your employer auto-enrol you?
Your employer must automatically enrol you into its pension scheme if you:
- Are classed as a worker
- Are aged between 22 and your state pension age
- Earn at least £10,000 each year
- Usually work in the UK
Is my workplace pension protected?
The type of protection your pension has depends on the type of pension you’ve got:
|Pension type||Type of protection|
|Defined contribution||Your pension is protected by your pensions provider. Check if the provider is covered by the Financial Services Compensation Scheme (FSCS). This could mean you’re entitled to up to £85,000 compensation if the provider goes bust.|
|Defined benefit||This pension is protected by your employer, who is responsible for making sure there’s enough money to pay the agreed amount. If the employer goes bust, they can’t touch your pension money. You’re usually protected by the Pension Protection Fund if they can’t pay your pension.|
What happens when I change jobs?
If you choose to change jobs then the money you’ve paid into your pension is still yours. Once you leave, you can consolidate it with other existing pensions, transfer it to a new provider, keep paying in, or leave it invested.
Make sure you keep hold of the details to log into your account and keep your details updated. If you have lots of different pension pots, it could be worth consolidating them into one pot.
Who holds my pension money?
The Government has its own scheme called the National Employment Savings Trust (NEST), which many employers join. Alternatively, your employer may choose another company which manages your investments. You’ll be able to decide on the levels of risk you’re willing to take with the provider.
A personal or private pension is one that you set up yourself. You can choose to manage it yourself or hire someone to manage the pension for you. The main benefit to a personal pension is that you can get great tax breaks on it, just like with your workplace pension. The government tops up your pension by 25% (or more) of your contributions. Ideally, after a long period of time, your money will have had a chance to grow!
Typically, by the age of 55, you’ll be able to withdraw 25% of your pension pot tax free. Anything more than this is subject to regular income tax. Like workplace pensions, you’ll also have the option to purchase an annuity.
Does a private pension affect your state pension?
No. Your state pension is based on your national insurance contributions, not your income. You can have a private pension and still receive your state pension.
Most UK citizens get some State Pension. The State Pension is a secured income for your retirement. The amount is increased each year at the rate of inflation. You can find out how much you expect to receive by checking on the government website. Your state pension comes from your National Insurance contributions which you make throughout your life.
If you haven’t yet reached the state pension age, then you’re likely to be on the new state pension. This differs a little bit from the basic state pension.
The new state pension is for women born on or after April 6 1953 and men born on or after April 6 1951.
To be eligible for any state pension, you need to have at least 10 qualifying years on your National Insurance record. This means that for at least 10 years (not necessarily in a row) you were working and paid National Insurance, you got National Insurance credits, or you made voluntary National Insurance contributions.
Anyone working in the UK who is over 16 and earning more than £183 per week (or self-employed and making more than £6,475 in profit per year) is required to make National Insurance contributions. If you don’t think that you’ll make enough contributions, you can make voluntary ‘catch-up’ payments to get back on track.
What happens to my pension when I retire?
As soon as you begin contributing to a pension, it can’t be withdrawn easily. It must stay in the pension pot until the age of 55.
At this age, you can withdraw 25% as a tax-free lump sum. The rest should ideally provide you with enough income for the rest of your life.
It’s up to you to begin planning as you approach retirement age. When your regular income stops, you need to make decisions about how much money to withdraw and how much you’ll be living on.
Can I track down existing pensions?
Yes you can. You can track down old pensions with the Pension Tracing Service. This lets you find out the providers of your existing pensions. You’ll need to contact the providers to find out the value of your pension pot and to transfer it, if that’s what you want to do.
You can’t track down an NHS, civil service, teacher or armed services pension with this service, but it does give you the contact details to help you track one down.
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