🎓 Pensions Academy Lesson 1
Sorting out your pension can seem incredibly daunting and all-too-easy to push to the bottom of the to-do list. However, it’s not nearly as complicated as you might think – and the sooner you start, the easier it will be.
Your future self will thank you for taking a little time now to get your retirement savings on track. Plus, there’s no feeling like seeing your pension pot grow – and knowing your future is sorted. 😎
In the first lesson of the Moneybox Pensions Academy, we get started with the basics and give you an overview of what you can expect to learn from the series. Let’s get started…
What is a pension?
Most people don’t want to work forever, so you need to save into a pension throughout your working life to build up enough money for retirement.
Think of it as your future fund – building it up now gives you more choice further down the line. You could stop work sooner (or gradually reduce your hours), have more money to travel, help your family or just generally enjoy yourself. 🏝️
Pensions have been around for about a century. They used to be funded primarily by the government and (later on) by employers when life expectancy was lower and therefore people’s retirements were relatively short. Nowadays, people are living longer, so retirement could last many more years, and there is only so much the state and businesses can pay in.
Today, the State Pension is only a small part of most people’s retirement income and private employers contribute much less to workplace pensions (though some public-sector workers can still get a generous deal).
That means most of us will have to pay more into our pension pot if we want to enjoy a long and happy retirement. But actually, if you start soon – even with small amounts – it isn’t difficult to build up your savings.
Types of pension
There are three types of pensions: State Pension – what the government contributes to your retirement income, workplace pension – if you are employed, you will be auto-enrolled into a workplace pension which both you and your employer pay into, and personal or private pension – a pension that you set up to supplement your retirement income.
We look at each of the types of pensions in more detail in Lesson 2.
What are the benefits of saving into a pension?
Pensions have a lot of benefits that make them a no-brainer when it comes to saving for retirement. 💡
Receive tax relief from the government, a.k.a free money
Tax relief is probably the biggest advantage of a pension as it is basically free money from the government. The tax you would normally pay on income is waived if you pay this cash into your pension. If you’re a basic rate taxpayer it only costs you £80 to add £100 to your pension, or only £60 for higher rate taxpayers and £55 if you’re a top rate taxpayer.
We dig deeper into how pension tax relief can work for your retirement savings in Lesson 5.
Pensions are invested in the stock market
When you contribute to your workplace or personal pension, you’re making an investment into the stock market and could benefit from it’s long term growth.
It’s unlikely you would be able to achieve the same growth from saving into an account that holds cash and pays a regular interest rate. In fact, although it’s impossible to predict the future, over the long term stocks have always delivered better returns than cash. Here’s a graph that shows the percentage of times during the last 116 years (up until 2015) that shares have beaten cash when held for 5, 10 and 18 consecutive years.* 📈
By contributing to a pension that you will probably hold and pay into for many decades, you really are investing over the long term and benefiting from the high returns. Though it’s important to remember, as with all investing, the value of your pension can go up and down, and you may get back less than you invest.
Find out more about stock market movement in Lesson 4 and learn how you could best protect and grow your pension pot. 🚀
Your pension is super-charged by compound returns
Your pension investment growth can also benefit from the magic of compounding, which Einstein reportedly called the “eighth wonder of the world”. ✨ Compounding refers to the return you get on your original investment and the return you get on your return. It takes time for compounding to work its magic, but over time your money can grow exponentially.
We take a further look at how compounding can play out for your pension savings in Lesson 7.
Get employer contributions into your workplace pension
Auto-enrolment into workplace pensions means that while you contribute to your pension, your employer also pays in a top up. So if you pay in the minimum 5% of your earnings, your employer is required by the government to pay in 3% of your earnings. This top up could even be more depending on the employer. Your contributions into a workplace pension are taken directly from your pay. While you can opt out, this would mean you’d essentially be giving up free money from your employer. 💸 And remember, all contributions will receive pension tax relief!
Pensions are protected by the Financial Services Compensation Scheme
Generally speaking, pension funds within the UK are covered by the Financial Services Compensation Scheme for up to £85,000 per eligible person, per firm. Do remember though, the FSCS doesn’t cover you if your investment performs badly. Moneybox and our Pension Provider (Gaudi Regulated Services Limited) are covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person for claims relating to investment products. Learn more about our FSCS Protection.
How do pension fees work?
You will need to pay fees while you’re investing – and the level of these could really impact how much is eventually left in your retirement pot.
Fees on workplace pensions are capped at 0.75%. For other kinds of pension, costs differ across providers. The most common are:
- Annual management charge or platform fee – usually a single percentage charge that falls as your fund gets bigger.
- Fund management fee – fixed service charges, which cover things like setting up the plan, annual administration, income withdrawals and buying funds.
- Transaction fees – sometimes you’ll pay a fee for buying and selling investments.
- Exit fees – some providers may charge to move your pension to another provider, though this is rare.
The level of fees can depend on what funds you invest in. Active funds tend to be more expensive because they involve a professional actively monitoring your investments. Passive funds (often called tracker or index funds) are usually cheaper because they follow the investment strategies of popular indices, such as the FTSE 100, and track their performance.
Costs often drop once your pot reaches a certain level (such as £100,000). So, usually it will be cheaper to hold just one workplace pension and one personal pension, rather than to pay for a clutch of smaller ones.
Over time, costs can take an amazingly large slice off your retirement savings without you even realising. 😳 So, to make sure you aren’t paying over the odds on any of your pension plans, we focus on pension fees in Lesson 7 and Lesson 8.
How do pension fees work?
Different types of pensions have different rules and requirements when it comes to accessing your money at retirement. The State Pension is usually paid into your bank account weekly once you reach the age of 66. However, it will increase to age 67 by 2028, and could go higher in future. Payments will also vary based on the number of years you have made National Insurance contributions.
With workplace or personal pensions, you can access the money at age 55, increasing to 57 in 2028. These also come with different withdrawal options – annuity, drawdown and lump sums. We take a look at pension withdrawal options in more detail in Lesson 10.
🎓 Let’s move onto Lesson 2 where we deep-dive into the different types of pensions and take you through how they differ.
*Source: Equity Gilt Study 2015.
As with all investing, the value of your pension can go up and down, and you may get back less than you invest. Tax treatment on your pension contributions depends on individual circumstances and is subject to change. Payments you make into your pension won’t be accessible until the minimum pension age (currently 55 increasing to 57 in 2028). We do not currently offer drawdown products (for the Moneybox Pension).