What is a pension?
A pension is a sum of money you receive on a regular basis. The money may come from the state or it could come from an investment fund or insurance product. Either way, the most important thing to realise is that the pension you receive is the result of a long-term saving scheme – a ‘pension scheme’. As with any saving scheme, you have to put something in before you get something out and, potentially, the more you put in, the more you’ll get out.
There are three ways you can save for a pension:
1. make National Insurance contributions and receive a State Pension
2. make contributions to a workplace pension scheme
3. create and contribute to your own private pension scheme
There’s no reason why you can’t do all three. Since 6 April 2006, ‘A-Day’, it’s been possible to contribute toward a private pension while simultaneously contributing to a workplace scheme – doing so will certainly help work towards that ‘financially secure and comfortable retirement’.
The State Pension
The State Pension is a ‘contribution-based’ benefit based on your National Insurance contribution history – how much you’ve contributed will determine how much you receive
In addition to your basic State pension, you may also receive payments from other state pension schemes, for example:
Graduated Retirement Benefit (GRB), which was based on graduated contributions paid on earnings between 1961 and 1975
State Earnings Related Pension Scheme (Serps), which ran between 1978 and 2002
State Second Pension (SSP), which replaced Serps on 5 April 2002
On 6 April 2016 a new State Pension system was introduced, its aim being to simplify what had become an extraordinarily complicated, multi-level scheme. However, although the ‘new’ system replaces the ‘old’, its application is restricted to those who reach State Pension age, and consequently becoming eligible to receive their State Pension, on or after, 6 April 2016. For those who reached their State Pension age before the 6 April 2016, their State Pension will continue to be based on the ‘old’ system.
Workplace pension schemes
Historically, many organisations offered membership of a workplace pension scheme as an employment benefit, but the Pensions Act 2008 changed that by introducing ‘automatic enrolment’. Phased in from 1 October 2012, ‘auto enrolment’ made it a legal requirement for every employer to ‘automatically enrol’ every ‘qualifying worker’ into a ‘qualifying workplace pension scheme’. It’s a concept that has fundamentally changed the employee benefits landscape, taking membership of a workplace pension scheme from being an ‘optional benefit for some’ to a ‘compulsory benefit for many’.
Auto enrolment may be seen by some as being an imposition as you, as an employee, are being forced to make a contribution to something you feel is either irrelevant or that you can’t afford. Yes, you are being forced into saving for your ‘financially secure and comfortable retirement’ – but the bonus is that your employer also has to make contributions on your behalf and the effect of that can be considerable, particularly when measured over a typical working lifetime.
Private pension schemes
In addition to your State Pension and any workplace pension schemes you may join during your career, you can also open any number of private pension schemes. Several types of scheme are available, each aiming to satisfy different investor requirements: stakeholder and personal pensions for those wanting to invest in a range of pension funds and Self-Invested Personal Pensions (SIPPs) for those who want greater involvement and the opportunity to have ‘hands-on’ management of their investment.
Receiving your pension
Most people fall into the trap of assuming they’ll receive their pension(s) when they retire, simply equating their retirement date with the date they reach their State Pension age. The reality isn’t so simple: there’s a lot to check out, understand, think about and organise.
Although your State Pension age is ‘set in stone’, the retirement date used in workplace and private pension schemes is often nominated which means it may fall before, on or after your State Pension age. So, although your State Pension age may have suddenly increased by a couple of years, it doesn’t mean your workplace pension scheme retirement date is affected – and that means you may be eligible to receive your workplace pension before you become eligible to receive your State Pension. An alternative scenario is that you may not become eligible to receive your workplace pension until a couple of years after you become eligible for your State Pension.
You can receive your State Pension without having to retire; you can go on working and, if you do, you may choose to defer taking your State Pension allowing it to increase in value. Likewise, if you’re still working, you also may prefer to defer taking your workplace pension and this can also increase in value.
If you want to take early retirement, ‘pension freedom’ means that, once you reach age 55, you have the right to access your workplace pension scheme and use it in any way you wish. Although there may be an early-redemption penalty and you may have to be careful about the tax implications, it offers yet more retirement opportunities. For more information, please visit Pension freedom and choice. (Giles, this links to the ‘Pension freedom and choice’ page of the website.)
Exactly how you’ll receive your pensions varies. Your State Pension will be paid to you in arrears, on a specific day, every four weeks. If your workplace pension scheme is a defined benefit or final salary scheme, you’ll receive a regular monthly payment from the retirement date specified in the plan, but if it’s a defined contribution scheme, you may have to use your pension pot to buy an annuity or regular income – but it very much depends on the type of plan. Similarly, if you’ve a private pension scheme you may have to buy an annuity if you want a regular income although the plan may offer other income options. With workplace and private schemes you’ll also be eligible to a take a tax-free, pension commencement lump sum if you want to.
The reality is that it’s rarely an overnight switch from having an income from wages or salary to having an income from a pension or pensions; the transition may happen over a period of years and it will need some managing.
How can One Financial Solutions help you?
One Financial Solutions is here to help you. We’ll work with you, assess your current circumstances, review your retirement goals and help you put in place a pension strategy to meet them, ensuring that having a ‘financially secure and comfortable retirement’ isn’t something that’s left to chance.
We’ll assess the value of your State Pension and make sure you receive everything you’re entitled to. We’ll review any workplace and private pensions you may have and recommend any changes we feel are beneficial. If you need a pension scheme we’ll find one for you and, as a truly independent firm of financial advisers, we’ll select one from the entire market and make sure it’s the best one for you.
So, if you’re looking for specific help about any aspect of your pension or just want advice on the subject, please call us on 020 3714 9565 or ask us to call you by sending an email to firstname.lastname@example.org.