Let’s talk about… pensions!
The world of pensions has seen a radical overhaul over the last decade and consequently, has never been far from the headlines. Some of the several measures which have been introduced over the last decade include auto-enrolment, pension freedoms and changes to the state pension age. Although some of these changes have so far been for the better, others have been extremely controversial – especially as far as women are concerned.
Despite all of this focus, pensions often fail to ignite a great deal of excitement. The world of pensions is littered with terminology, often making it difficult to understand. Furthermore, due to the fact they’re only accessible from a minimum of age 55, pensions are often overlooked by younger generations, who will most likely be more focused on more ‘immediate’ goals, such as getting on the housing ladder.
Unfortunately, the facts around women and pensions demonstrate a clear problem. A report released in July 2019 based on research by the Pensions Policy Institute claims that women will be an average of £106,000 worse off than men at retirement. Another report (published in October 2018 by the CII) found that at age 65, women have average pension savings of £35,800, some 20 per cent the size of £179,000 pots held by men.
Saving for retirement has never been a more important issue for women. So it’s vital to gain a good understanding of the different types of pensions available and how to start saving.
Let’s start with the obvious question – what is a pension scheme?
In simple terms, a pension scheme is a type of savings plan to help you save money for later life. The first thing to point out is that being in a pension scheme is different to being eligible for the State pension. Many people wrongly assume that they’ll automatically be eligible to receive the state pension and that they therefore don’t need to consider setting any other money aside. If you’ve worked and paid national insurance for at least 10 qualifying years during your lifetime you will likely qualify for the state pension. However, the single tier State Pension currently provides a maximum of £168.60 a week – with this amount only being accessible to those with 35 qualifying years of National Insurance contributions. The age at which the State Pension can be accessed has recently increased and by October 2020, the State Pension age will be 66 for both men and women. The Government is planning further increases, which will see the State Pension age rise to 67 between 2026 and 2028.
Against this backdrop, saving into a pension scheme is a vital way for most women to support their income in retirement. There are two main ways to save into a pension scheme, as outlined below.
Employer pension scheme
So long as you are aged between 22 and State Pension age and earn at least £10,000 per year, you will be automatically enrolled for a pension with your employer. One of the main benefits of being enrolled in a company pension is that in addition to contributing yourself, your employer must also make payments into the scheme. As of April 2019, the minimum level of contribution is 8% qualifying earnings, of which at least 3% must be paid by the employer.
A personal pension is a way of saving for retirement independently of an employer. Often the ‘go-to’ for self-employed individuals and company directors, personal pensions can be set up by anybody who wishes to take a proactive approach to pension savings.
Within the bracket of personal pensions there are a number of different types – you can take out an ordinary personal pension, but some company owners choose to invest in a SIPP (self invested personal pension) or SSAS (small self administered scheme) instead. The main difference between these different types of scheme is what you can invest in and the best option will depend on your circumstances.
Encouraging individuals to save for their retirement is of benefit to the government and as such, there are several tax breaks available when contributing to a personal pension. Where money that is paid into a scheme from earnings, tax can be reclaimed at the individual’s marginal rate when making an end of year tax return. Directors can make employer payments into a personal pension scheme, with such payments being exempt from corporation tax.
Both employer pensions and personal pensions can be divided into two types – defined benefit and defined contribution. The main difference between a defined benefit scheme and a defined contribution scheme is that the former promises a specific income and the latter depends on factors such as the amount you pay into the pension and the fund’s investment performance.
With both employer pension schemes and personal pensions, the minimum age that funds can be accessed is currently age 55 – although this is expected to rise to 57 in 2028.
The good news is that once you have decided how to save for retirement and have a pension in place, the rest is relatively straightforward during the time you are working and contributing to your pension pot. The golden rule is start today rather than wait until tomorrow – the younger you start saving for a pension the more chance your funds will have to grow the more options you will have by the time you reach retirement age.
The idea behind this series of blogs is to break down the barriers to some of the things we, as women, fail to discuss openly. We want to keep things simple, but in doing so, understand that some questions may be raised. This is the point – we need to get talking about financial matters – so let’s start the conversation!