Make The Most Of Your Workplace Pension
Is it working for you?
What is a workplace pension?
In a nutshell, it’s a very efficient way to save money for the future. It’s likely your employer already offers a workplace pension (and new legislation means that over the next few years, all companies must offer them, under the government’s new auto-enrolment scheme), but not everyone understands what they’re all about.
How does it work?
You and your employer club together to put aside a percentage (currently 5% minimum, rising next year to 8%) of your total earnings (between £5,876 and £45,000 a year before tax), and when you retire you get it back, plus whatever it has gained through investment in stocks and bonds. You don’t pay tax on these savings, so every £80 you contribute effectively rises to £100 (for a basic tax payer).
Here is a handy calculator from Money Advice Service.
Over the years you are contributing, your employer will use a pension provider – probably one of the famous ones, like Scottish Widows or Aviva – to invest the money on your behalf. As they know it’s a long game, with most people sealing away their money for several decades, they may invest it in high risk markets to begin with, then more stable ones as you approach the age where you’re going to be claiming it back.
What are the pros & cons?
You have the option to add more money in if you’re feeling particularly flush, or particularly worried about the future (guess which is more likely!). Currently, the allowance is £40,000 tax free (or 100% of your earnings – whichever is less).
You also have some control over how your money is invested. Yes that’s right, you don’t have to blindly trust the pension provider to be doing the right thing if you think you know better, or would like to avoid or get involved in a particular area, like tech or energy. You can have a dialogue with your provider, and it makes sense to do so. Anything to feel more empowered, right?
The downside of pension investing as opposed to, say, an ISA, is that you can’t get access to it even if you really need the money, until you’re at least 55. After you reach that age, however, you can take 25% of it as a tax free lump sum.
Also, you need to stay vigilant with how your pension and investment needs are changing over time. This is not the “sit back and relax” option it might seem.
How do I make the most of it?
Make sure you know who your pension provider is, and what they are doing with your money. Keep the dialogue open, and stay on top of general trends in the market. Is your provider putting your money in bonds? Did you know that bonds are seriously overvalued right now?
10 years away from retirement? You need to start thinking about changing your workplace pension savings to a format that will give you an income in old age, rather than a lump sum. Talk to your provider and keep up with any new government regulations.