The Pension Protection Fund isn’t an organisation you’d expect to provide financial guidance.
They’re keen to show that they want the people who they’ll be paying pensions to, to get as much help before they take their benefits as they can.
The PPF is not an “island for misfit pensions” , it’s a well run fund that administers people’s retirement income efficiently and with care.
I’ve been asked to publish what they are telling their members , as a help to readers awaiting the payment of pensions….. and as an example of current practice – for other schemes.
This is the first of two blogs I’ll be republishing this week. Sadly the modest author cannot be congratulated but thanks to the PPF for sharing.
Whether you’re living for the weekend, paying off a mortgage or thinking about a wedding, topping up your pension probably isn’t at the top of your to-do list in your 20s, 30s, or 40s. Indeed, in our recent research, we found that many people don’t think about retirement until they hit 50.
This, however, means they have less time to try to build up their pension savings if they need to. And that might mean they have less to get by on when they finally leave the working world.
Even if you intend to work forever, you can’t predict how your circumstances or desires may change as you age. So, if you’re currently in your 20s, 30s or 40s, now is a great time to start preparing for your retirement – since you’ll have more time to save.
Benefits of saving early
Retirement may seem like a long way away, but the benefits of planning for it as soon as possible are significant. Fundamentally, the longer you spend saving, the larger your pension pot is likely to be – and the more comfortable your retirement.
When you’re younger, you’ll usually be earning less and be saving for other things, such as a house deposit. But it pays to start saving early. Here’s why:
- You benefit from tax relief: Each time you pay into a private pension, you receive pension tax relief which increases the value of your pension. The longer you save, and the more you put in, the more money you get.
- You may benefit from compound growth: Private defined contribution pensions are investments designed to generate income on the money you invest in them. If the pension fund performs well, the income is added to the amounts you deposited, meaning more money is available to generate future income.
The cycle of reinvestment of income can significantly increase the value of the original pot over time – known as compound growth. The earlier you start saving money in your pension pot, the more time your pot has to grow. If you start saving later, you may need to put in significantly more money to end up with the same income in retirement.
What do you need to live on to retire?
Everyone’s circumstances are different, and the amount you need to retire on depends on many factors. If you live alone and don’t have expensive tastes, you might be able to get by on a relatively small pension. On the other hand, you might have dependants, or wish to spend your golden years travelling the world, so would need a lot more. By estimating how much you’d want to live on per year, you can figure out how much pension you’d need for that lifestyle. The Retirement Living Standards website has a useful guide to what life in retirement looks like at different income levels.
If you are one of our members, you can use our online Benefit Modeller to see an estimate of your PPF retirement income. You can then use this information to figure out what your pension might look like.
How much pension will you get?
If you’ve just started thinking about your retirement, you might be a little unclear on exactly how much pension you’re going to get. Figuring out the precise amount will depend on a number of factors, but to get a rough idea, think about:
Your state pension
Most people receive a state pension when they retire, if you’re under 50, the state pension age is usually between 67 and 68. In 2022-23, a full state pension will be £9,630 per year – and it increases annually. This might be enough to cover your most essential needs, but on its own may not be able to support your plans for retirement.
You won’t automatically get the full state pension; you need to have accrued 35 “qualifying years” to receive the full sum. If you’ve worked fewer years, you’ll receive less.
Since 2018, all employees aged 22 and above –- and earning over £10,000 – are automatically enrolled on a pension scheme by their employer. Even before 2018, many employers offered a pension scheme to their staff. Essentially, a percentage of what you earn gets paid into a private pension fund and your employer tops that up. The minimum is usually 5 per cent from you, then 3 per cent from your employer.
You aren’t obliged to stay in the pension scheme, but it makes a lot of sense for most people. Since your employer needs to pay at least 3 per cent of the value of your salary into the pension, you’re essentially getting extra money from your employer and the government. Few people would turn down a pay rise, so think carefully before opting out of your company pension too.
Private pension funds are a form of investment – which means the value of your money can go up, but it may also go down.
Depending on how long you’ve been working and the number of employers you’ve had, you might have several pensions with different funds. It’s worthwhile keeping track of your pensions and storing information about them digitally. That means you can find them more easily. If you lose track of them, you can use the government’s Pensions Tracing Service to find them.
Other (non-workplace) personal pensions
In addition to your workplace pension, you might also decide to put money in an additional personal pension too.
Some people might choose to pay into a private pension fund separate from the one they’re enrolled with through work. They might, for instance, choose to put any ‘windfalls’ they receive into this pension and leave it to grow.
People who understand financial markets and are prepared to research their investments might also consider investing in a Self-Invested Private Pension (SIPP). Self-employed people often choose to use SIPPS.
Get advice for your situation
Everybody’s circumstances are unique, so it’s not always easy to work out exactly how much you should be saving for retirement. And this is why many people choose to work with an independent financial advisor. They can advise on how much you should be saving and the best way to increase your pension pot.
The government’s MoneyHelper service has a handy guide to finding an independent financial advisor.
Learn about your benefits if you’re a PPF member
If you’re a PPF member, you can find out more about your pension and your personal retirement options, by using our convenient online Benefit Modeller.
Getting to grips with your pension in your 20s, 30s and 40s means you’ll be better prepared for your retirement – however you hope to spend it.
Recognising that the impact on the individual is a quite different experience for many and a two dimensional representation is rarely useful
Take the recent news on inflation contribution of Transport, the third largest group represents 13.6% of the shopping basket but accounts for 30% of CPI inflation. The two main culprits are Fuel and lubricants, with annual inflation of 26.8% and a 2.7% weighting in the overall index; and Second-hand cars, with annual inflation of 28.6% and a 1.6% weighting in the overall index.
Air travel recorded a 28.8% annual increase, but only accounts for 0.2% of the overall index.
The next largest contribution came from Housing, water, electricity, gas and other fuels, again with predictable culprits:
Electricity, with annual inflation of 18.8% and a 1.9% weighting in the overall index; and
Gas, with annual inflation of 28.1% and a 1.2% weighting in the overall index.
The big increase/small relevance component in this group was liquid fuels (eg heating oil) which recorded a 52.2% annual increase, but with a weighting of 0.1%.
The breakdown of inflation components highlights why inflation can seem so different to different people. Someone living in an oil fired cottage who regualry commutes by car will have a much higher rate of personal inflation than the occupant of an electrically heated town flat who has owns only a bike and walks to work.
The need for individual advice is clear as it does take a wider personal view however the prescriptive way in which advice has to be framed and the lengthy reports with all the opt outs attempting to stay within the scope of PI make the cost above what many can spare from meagre income
I have to say this is a brilliant piece of intelligible and helpful plain English. It may not cover everything (perhaps too little on “the value of your investments may go down” but that’s ok because those warnings appear on DC products. I really like the way it expresses the folly of forgoing employer contributions.
I wonder if I sense the hand of the Behavioural Insights Team trying to “nudge” people in the right direction.