Retirement is probably the last thing on your mind, but the reality is that at some point you will stop working and you will still need to pay the bills and eat and you’ll need a pension.
Vivi Friedgut gives us the low down on pensions
Vivi was inspired to start her own company after realising that many people didn’t have the kind of knowledge and understanding about managing their own finances that she did. After working in wealth management for nine years and at a time when student fees had been introduced Vivi founded Blackbullion. Vivi visited universities providing information for students, who loved it and after this she took the service online to make it accessible to even more people. We asked her all your pensions questions.
What is a pension exactly and how do pensions work?
A pension is basically a pot of money that is built up and which provides you with an income when you retire. There are two types of pension, state and private. The state pension is distributed by the government. People contribute to the state pension money pot through national insurance payments and then when you reach retirement age the government provide you with a pension.
The retirement age for the state pension can change. At the moment it is 65 but this may rise to 70 or 72. We do not know exactly what will happen but we do know that with the population rising and people living longer the state pension will not provide enough money to live comfortably.
What is auto-enrolment?
Auto-enrolment is being rolled out over the next few years and it means that when you start working at a company and if you are 22 or older that company will automatically enrol you onto their pensions programme. This means that you will start saving a little bit each month and your employer will put some in too and will invest that money on your behalf so that hopefully by the time you access your pension pot your money has grown.
When should I start paying into a pension?
A pension is a very important tool that everyone should have because we will all stop working eventually. Most young people underestimate how much they will need in their pension pot. It is estimated, based on the expected retirement age of 67 and life expectancy of 81 that you will need around £336,000 so the earlier you can start saving the better.
When you are young you might have other things that you want to invest in, such as buying your own home. Putting money into a pension pot ties that money up for a long time so you can’t access it so it’s about balancing your long term needs with your short term goals.
Other savings options include ISAs where your money will be earning interest and be safe, but there will be no tax benefit like there is with a pension and you won’t get a proportion from your employer.
You have to think about the fact that you will stop working at some point and you will still need to pay for things, so whatever the plan there should be some plan – for say 30 years of eating and heating – ease the pain.
How much should I pay into my pension?
As a rule of thumb you should look at saving an amount equivalent to half your age, so if you are 18 then 9 per cent, if you are 30 then 15 per cent. When it comes to workplace pensions put in as much as the company will match; if they will match 5 per cent then put in 5 per cent in.
What happens to my pension if and when I leave one job and go to work somewhere else?
When you leave a company you do not lose the money in your pension pot. When you move to another employer you can move your pot of money with you. You will pay a small transfer fee to do this but the alternative is to end up with lots of pension pots all over the place that you need to keep track of. When you move to another employer speak to someone in the HR department and they will be able to point you in the right direction.
Why can’t I just put a bit of money aside each month and save up for when I retire?
The short answer is that you can if you like but stashing cash under the mattress is not a good idea for many reasons, one being that you will not earn any interest.
Where does the money I pay into my pension go?
A lot of pension will be invested in the stock market so it really is a good idea to get some understanding of the stock market and how it works.
How do I get my pension when I retire?
The government will automatically let you know when you become eligible for your state pension and you will get it. Private pensions work differently. It used to be that you had to buy an annuity and this would pay you X amount per week, you don’t have to do this anymore – you can just take out the money – it is your money after all.