Getting to grips with your pension

Pension basics

The first thing most people ask is “Why do I even need a pension?” That’s a good question, especially in our current financially challenging times. And there are several good answers to it:

• Saving into a workplace pension gets you additional contributions from your employer. They’ll top up any payments you make into it. 
• If you don’t have one, you’ll have to rely on the State Pension once you reach retirement age. It’s currently at most £11,502.40 a year. That won’t support most people’s ideal retirement lifestyles – the Retirement Living Standards website can help you find out how much yours could cost.
• Pensions are very easy to start paying into.
  • Your employer will set up your workplace pension for you – that’s called auto-enrolment. They’ll pay your money directly into it.
  • If you don’t have a workplace pension (for example, if you’re self-employed), you can opt for a personal pension. They’re quick and easy to set up.
• Pensions are a very tax-efficient way of saving. You don’t actually pay tax on any money that goes into them. And if you have a personal pension, the government boosts your contributions through tax relief, up to 25%.
• Like any investment though, your pension's value will go up and down. So you might get back less than you put in.

How much should I consider paying into my pension?

Some people say you should pay in half your age. So, for example, if you’re 30, you might want to contribute 15% of your salary to your pension (including any money from your employer). The least that can be paid into a workplace pension is 8% of your salary – you pay 5% and your employer 3%.

If you want to take a more planned approach, you should pay in as much as you:

• Can afford to pay right now
• Need to support your ideal later lifestyle

Our How much should I pay into my pension article shows you how to work that out.

How can I help my pension grow?

Starting early is the best way to grow your pension savings. That:

• smooths out any of the market ups and downs that always come with investing
• gives you and your employer more time to pay money into it
• helps you take advantage of the magic of compounding

If you get a bonus, you can pay some or all of it into your pension through salary sacrifice – and you won’t pay any tax on it. It’s also worth thinking about keeping up your payments if you’re on maternity leave, to make sure you also keep getting those lovely employer contributions.

Once your money’s in your pension, you can choose how it’s invested. Some investments offer higher levels of risk with the potential for higher growth. They might be better suited to investing for the long term to allow time to recover from any loss in value that's more likely with higher risk investments.

What happens to my pension when I change jobs?

When you change jobs, your new employer will auto-enrol you into their pension scheme. That’s the one you and they will pay into while you’re in your new job. Your old pension will still belong to you. You can either leave your money invested in it or transfer it across to your new pension.

What should I do if I have lots of pension pots?

If you do end up with lots of different pension pots, transferring them all into one pension could be a good idea. That’s called consolidation. It can make managing your pensions much easier, although it’s not right for everyone or for every type of pension.

There’s no time limit on transferring pensions – you can consolidate them whenever you want to. And it’s easy to find any pension that you’ve lost track of. Our article on how to track down your old pensions shows you how to do that and explains consolidation in more detail.

When can I access my money?

You can access the money in your pension pot once you turn 55, rising to 57 from 6th April 2028. That means you don’t have to wait until you start getting your State Pension in your late 60s to retire.

Though of course you might also choose to keep working through your 50s and beyond so you can invest more money and give it more time to grow. And you don’t have to stop working to access your pension pot – you just need to be old enough.  

What should I do next?

We have lots of info that can help you learn about pensions –

• Inspire yourself with the Financial Independence, Retire Early (FIRE) Movement
• Understand how pension charges work
• Find out more about the three different types of pension we’ve mentioned above
• Listen to our podcast A Little Bit Richer for bite-sized tips about pensions and money management