MARTIN Lewis has rounded up seven things you need to know about your pension including a clever trick to work out how much to save.The MoneySavingExpe
MARTIN Lewis has rounded up seven things you need to know about your pension including a clever trick to work out how much to save.
Your pension is the money you’ll live off when you stop working.
But it isn’t as simple as having one lump sum, as there are different types of pension plans you can pay into during your working life.
Martin explained how pensions work in his Martin Lewis Money Show on ITV last night.
Top tips to boost your pension pot
DON’T know where to start? Here are some tips from financial provider Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you’ll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
- Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you’re saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
1. What’s the difference between a state pension and private pension?
There are different types of pensions you can claim in later life.
A state pension is paid to by the government when you reach retirement age, with the amount you get based on your National Insurance contributions that you’ve built up in your working life.
The state pension is currently split into two systems, depending on how old a person is and when they retired.
Men born on or after April 6, 1951, or women born on or after April 6, 1953, will be able to claim the new state pension.
For those who reached the state pension age before April 6, 2016, you’ll be getting the old state pension, known as the basic state pension.
Both the new and basic state pension are rising by 2.5% in April – see our guide for how much you could claim.
As well as the state pension, there are personal pensions that you either save for yourself, or through your workplace.
The amount you get varies depending on how much you save.
Not everyone has a private pension and you can choose to opt out of your workplace pension.
2. How much should you be saving?
Martin said the “rough rule of thumb” is to take the age you start saving, halve it, and put that percentage of your salary into your private pension for the rest of your life.
This will give you roughly two thirds of your final salary each year in retirement.
So if you start saving from the age of 25, the percentage of your salary that you should be putting away is 12.5%.
But this does mean, the later you start saving, the bigger percentage you’ll need to contribute toward your pension each month.
For example, if you don’t start saving until you’re 40, the percentage of your salary that you’ll need to put away goes up to 20%.
Martin used pictures of celebrities Dina Asher-Smith, 25, Rochelle Humes, 31, and Ben Shephard, 46, to demonstrate his point.
He explained: “The real message I want you to get out of that is the earlier you start contributing toward your pension, the better and the less of your salary you have to put in.”
Meanwhile, separate research from Which? has detailed how you need to put away £131 a month from the time you are 20 years old to have a comfortable pension of £26,000-a-year.
3. What is auto-enrolment?
Auto-enrolment is when you’re automatically placed into your workplace pension scheme, with your contribution deducted from your pay packet.
Bosses have had to automatically enrol staff into pension schemes since October 2012 to get workers saving for their golden years.
The only exception is if you’re under the age of 22 or earn under £10,000, in which case you have to ask to opt in.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
Research by NOW: Pensions in December 2020 showed 2.5million workers aren’t enrolled in their workplace pension scheme.
Crucially, the contribution you make as an employee is deducted before tax – so the actual amount you’re putting away is less than it sounds.
For example, if you pay 20% tax on your earnings, and your pension contribution is £100, this only really costs you £80 as this is how much that amount would have been worth after tax.
While opting out of a workplace pension would increase your monthly salary, Martin advised doing this “unless you absolutely have to”.
He said: “I understand it reduces your take home pay but the benefit for later in life is absolutely crucial.”
4. When can you access a private pension?
You can start claiming your private pension from the age of 55, although this is increasing to 57 from 2028.
It’s thought 860,000 people currently aged between 46 and 47 will be hardest hit as they turn 55 in 2028.
Millions more younger workers will also be affected but it’s unlikely they’ll have had firm plans in place over when to access their pensions.
But despite the age increasing, Martin urged against splashing your cash too soon.
Savers should think about how likely they are to live, in order to then estimate how long their pot needs to last them.
5. Are you taxed on your pension?
When you take out a private pension, 25% of your savings is tax-free and the remaining 75% is taxed at your marginal rate.
There may also be charges for cashing in your whole fund, and not all pension schemes will offer this option.
Tax charges applies if you take out your money in stages too.
For example, if you had £100,000 and took £20,000 out you’d get £5,000 of it tax-free and pay tax on the rest.
Martin suggested speaking to experts about the most tax-friendly options for your savings.
For example, it may be worth considering a flexible income drawdown or an annuity – but always seek advice before making any crucial decisions.
Income drawdown is a way of getting pension income when you retire while keeping your pot growing, while an annuity is regular income direct from the fund.
6. Can you leave your pension to a loved one?
If you have a private pension, Martin explain that it is possible to leave it to your loved one if you die before your retirement.
However, they may have to pay tax, based on their current rate, if you die after the age of 75.
If you die under the age of 75, the amount you leave is tax-free.
Martin was asked by one viewer if they could leave their pension to their loved ones if they die before retirement.
In terms of the state pension, you might be entitled to extra payments from your spouse or civil partner if they pass away.
You can’t pass on the right to your state pension to your children or grandchildren.
7. How do I get free pension advice?
If you’re really baffled by your pension, you can seek free advice from impartial experts about how the system works.
On his show, Martin was joined by pension expert Kaya Merchant from the Money and Pensions Service.
The Money and Pensions Service is sponsored by the Department for Work and Pensions and combines the following three services to form a single guidance body:
These services are generally used if you want guidance about pensions – they don’t offer advice about specific products or private plans.
For this type of advice, you would need to pay to see a pensions specialist.
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