Retiree 1: I’m pretty sure most of us have days where we can just please ourselves, which is a nice sort of circle, come circle from the hectic days of work. I take our two dogs for a walk in the morning, DIY, and because we’re now closer to my son, I am going over to help him.
Retiree 2: You can take the pace out of things. I think to myself, how on earth did I get the washing and any shopping done? You’ve got the space to do those things. So I’m not necessarily doing lots of stuff that’s different; what I’m doing is a better pace, more spread out, at times that suit me better.
Retiree 3: My cat’s usually hassling for his breakfast. He pokes me in the eye with his paw saying, "It’s my breakfast time, are you going to get up?" I get up to go and make my tea and give him his breakfast and then I go back to bed for a while. Eventually, I might get up when I feel it. I’m never in any great hurry.
Jenny Ross: No matter how far away you are from retiring, you’ve probably given some thought to how you’ll spend your time when you get there. A cruise round the Med, tending to your allotment, or just spending more time with the grandkids — we’ve all got an idea of what a world after work looks like.
But thinking about how you’ll afford that dream retirement lifestyle isn’t quite as much fun. I asked a few of my own colleagues here at Which? for their thoughts on saving for retirement.
Colleague 1: I feel retirement is very far away and I don’t really need to think about it yet. I feel because I’ve got a pension in my current job, that’s kind of all I need to do at the moment.
Colleague 2: I feel a bit daunted because I feel it’s an expertise that I’m not entirely au fait with.
Colleague 3: I know it’s ticking in the background and for me, I know I need to log in and just check if it’s all right.
Colleague 4: It feels a lot to do and a very important outcome. Obviously, it has a very significant long – term importance, but as it stands, it’s not the most important thing I’ve got going on at the moment in my life.
Jenny Ross: That’s why we’ve created this four – part podcast series to help you feel more confident about your future finances. I’m Jenny Ross, editor of Which? Money. Welcome to this podcast from Which?.
Jenny Ross: Let’s start by going back to basics. The word pension comes from the Latin word pensio, meaning payment. Even if you didn’t know that, you’ll know that pensions are a way to save for retirement. But do you know what sets it apart from other types of savings or investment accounts?
Colleague 3: An ordinary savings account is probably something that you might need to access within the next year or so, or the next couple of years maybe, whereas a pensions account is a much more long – term savings and investment account.
Colleague 4: I would say that a pension you can only take the money out once you retire, whereas a normal savings account, depending on what it is, you could take it out any time.
Colleague 5: A pension is very much reserved for future use, while a savings or investment account gives you more freedom in most cases to take the money out and add money when you want.
Jenny Ross: You’ll probably have a savings account or two and use it to pay for emergencies, holidays, maybe even for Christmas presents. Perhaps you have an investment portfolio, too, for your longer – term savings goals. But pensions work a little differently, and what sets them apart is something called tax relief.
Dale Critchley: Nothing beats a workplace pension when it comes to efficiency in saving for your retirement.
Jenny Ross: Dale Critchley is the policy manager at Aviva.
Dale Critchley: First of all, you’ve got your employer pension contribution. Quite commonly, the more you pay in, the more your employer will pay in, but everyone gets an employer pension contribution. And secondly, the government also pay in through tax relief. That means for every 80 pence that you contribute, 100 pence is actually invested in your pension scheme.
Jenny Ross: And because pension tax relief is linked to the rate of income tax you pay, if you pay more than the basic rate of income tax, you’ll benefit from a higher level of tax relief. So, if you pay the higher rate of 40%, making a £60 pension contribution would actually boost your pot by £100, as you’d be entitled to £40 in tax relief from the government.
If you’re employed, the good news is that you’ll be automatically signed up to your workplace pension scheme when you start a new job, as long as you’re 22 or over and earn more than £10,000 per year. If you’re under 22 but earn at least £6,240, you can still choose to enrol; it just won’t happen automatically.
Workplace pensions are usually what’s known as defined contribution schemes, where you contribute a portion of your salary each month. As we heard from Dale at Aviva, the even better news is that your employer will make a contribution too. But many of us aren’t sure how much we’re contributing.
Colleague 1: I think I’m contributing about 3% of my salary, which seems like enough because my employer puts in a bit more.
Colleague 5: I do know how much I contribute. It’s not something I know off the top of my head, but it’s something I can very easily look up.
Colleague 3: I think 3%. That’s something I’ve only become more conscious of in the last couple of years and there was a really long period of time where I just had no clue basically.
Jenny Ross: Under the rules of automatic enrolment, pension contributions are set at a minimum of 8% of your earnings. Usually, this applies to earnings between £6,240 and £50,270. This is known as your qualifying earnings. The 8% is made up of 5% from you, including tax relief, and 3% from your employer.
So, let’s say your salary is £30,000. First, you’ll need to deduct the lower earnings threshold of £6,240 to work out your qualifying earnings — in other words, the part of your pay that’ll be used to calculate pension contributions. In this scenario, this is £23,760. Then we need to calculate 8% of £23,760 to work out the total amount that’ll be going into your pension. This works out at £158.40 a month, which breaks down as £99 from you, including tax relief, and £59.40 from your employer.
I didn’t work that out in my head, by the way. I had a calculator to hand. For an easier way of checking exactly how much is going into your pension each month, you can just check your payslip or ask your employer directly.
If you’re self – employed, saving for retirement is more of a challenge as you won’t benefit from employer contributions. Yes, you’ll still get tax relief on the money you pay into a pension, but you’ll have to set up the pension yourself rather than being automatically enrolled in a workplace scheme.
Whether you’re employed or self – employed, you can’t access the money in your pension until you’re at least 55, going up to 57 from 2028. But this money doesn’t just sit in an account doing nothing until you take it; it gets put to work. Here’s Dale Critchley again.
Dale Critchley: Those pension savings are invested in funds. These might be set up by the scheme, known as default funds, or you can choose your own. The funds are made up of different kinds of investments designed to grow your pension over time, and they grow tax free. The final size of your pension pot depends on how much you pay in and how well your investments perform. Ultimately, that will shape your lifestyle in retirement.
Jenny Ross: So, the combined power of tax relief and investment growth mean that over time, your pension pot should be worth considerably more than you and your employer have paid into it.
I say pension pot, but you might have more than just one. If you’ve changed jobs a fair bit throughout your career, you could actually have a lot more than one, because when you move to a new employer, your pension won’t automatically follow you. This can create a real admin headache. According to Pensions UK, more than three million pension pots are considered lost, with each one worth an average of almost £9,500. You could own one of them and could end up missing out on a valuable boost to your retirement fund.
So, what can you do to keep tabs on old pensions? It’s nice and easy to get going and you can do it right now. Start by making a list of all your previous employers and check if you have the details of the pension scheme you had with each one. If you’re not able to find contact details for a previous employer or pension provider, you can use the government’s free pension tracing service to confirm them.
Once you’ve tracked down all your pension pots, it’s time to think about whether or not to bring them all together in one place. Tom Selby is the director of public policy at AJ Bell.
Tom Selby: It can be a really attractive thing for people to combine their pensions. For some people, it won’t be possible — so if you’ve got certain types of defined benefit pensions, then you’re not allowed to transfer those. So those are unfunded defined benefit pensions. But if we’re looking just at defined contribution schemes — so where you build up a pot of money that’s going to be used for your income in retirement — combining them can be a really useful thing to do.
For most people, the key reason for combining is simplicity. So, you don’t have five, six, seven different bank accounts dotted around all over the place because that would be quite difficult to track and difficult to monitor. People tend to have one, maybe two bank accounts. A similar principle applies to your pension — why would you have all your pensions dotted around all over the place? Very hard to know what’s in them, very hard to generate an income in retirement from those.
Simplicity is the main reason that people will do it, but there’s other potential benefits as well. So, you can benefit from more choice in terms of the kind of income you can take. You can benefit from lower charges if you pick the right pension scheme. More flexibility, more choice. So, lots of potential benefits, but if you’re going to combine your pensions, then you need to be aware of some of the risks as well.
So, if you’ve got an older – style policy, then some of those will have quite valuable guarantees attached — so things called guaranteed annuity rates. If you transfer the money, you’ll lose that guarantee. So, you need to be aware of that. Again, older – style policies — not modern ones, but if you took out a policy 20, 30, maybe even 40 years ago — there may be exit charges applied to that as well, which will mean that the value of the transfer would be less than you might otherwise think it would be.
And then for the majority of transfers, you need to think about things like charges, investment performance, investment choice, all that kind of stuff. But if you’re comfortable with all of that, if you’re comfortable that you’re not giving up something really valuable and there’s something better for you somewhere else, then getting it all in one place — just as a human being — is just easier to have everything in one place so you can make sensible decisions about your retirement.
Jenny Ross: Getting your pensions organised is a big step in the right direction for your retirement planning. But how do you know if you’re saving enough? That’s the question we’ll be tackling in our next episode.
In the meantime, we have plenty more pensions advice and news on our website; just go to Which.co.uk/retirement. We also have a monthly retirement planning newsletter full of tips and analysis to help you take charge of your savings. Sign up at Which.co.uk/retirementnewsletter.
