Your employer wants to give you free money – on top of your usual salary. It sounds too good to be true, but they are so keen to give you this cash that (assuming you earn enough) they will automatically put money away for your retirement, without you having to ask. However, it doesn’t end here, and in many cases if you get to grips with the pension your employer is offering, you can get even more cash out of them, make it grow as fast as possible during your working life, and maximise the income you can take in your golden years. Of course, learning about a workplace pension isn’t the most thrilling thing you can do with your time – but it may well be the most rewarding.
There are two main types of workplace (or occupational) pension: defined benefit (of which the most common type is final salary) and defined contribution (also known as money purchase).
Defined benefit pensions will guarantee a particular income every month in retirement – based on how much you earn and how long you are with the organisation for. They are the most generous pensions available, because as long as you make the contributions expected of you, it’s up to the employer to ensure that they deliver on their promises – no matter how the pension investments fare, or how log you live in retirement.
Unfortunately, these are so expensive for employers to offer that many private sector employers are dropping them in favour of Defined contribution pensions. These are essentially pension pots that you and your employer pay into. You get to choose where that money is invested, but there are no guarantees, and when you retire, you will simply get whatever the pot is now worth. It will be up to you to decide how to live off it in retirement.
Whatever kind of scheme your employer operates, they will also be subject to what’s known as autoenrolment. This means that as long as you earn enough money, both you and your employer will have to contribute a fixed amount into your workplace pension – unless you have specifically chosen to opt out. Many employers will offer the bare minimum (which falls far short of what you will need to live on in retirement), but others offer more generous contributions.
The first step is to find out what your employer offers. If it’s a defined contribution scheme, in some cases, the amount on offer from your employer will depend on what you put into the scheme, so it’s worth considering how much you can afford to invest in order to take advantage of any extra free money.
Some defined benefit schemes will offer the chance to make AVCs (additional voluntary contributions), and some will even match these contributions.
In a defined contribution scheme, the money you put in will automatically go into a default fund, unless you choose where you want your money to be invested. This is designed not to be a disaster for anyone, but it’s worth discovering what your default is, and whether it suits you.
Work out what you are due to receive
Next, it’s worth discovering the kind of pension lump sum or income you can expect from your occupational scheme. You should be able to get an overview of pension performance and its projected value from your employer. You can factor in your state pension by getting a state pension forecast. It’s then worth using one of the free online pension calculators. It only takes a few minutes but will give you a good idea of what you’re likely to get.
What if I have a number of different pensions?
If you’ve worked for a number of employers over the years, you may have a number of different occupational pension schemes, so you will need to track down any lost pensions. The government runs a pensions tracing service to help get the contact details of old employers, so you can write to them.
There’s no requirement to consolidate all your schemes into one, and if you do you can lose valuable guarantees. However, it’s worth checking whether you are paying exorbitant fees for any pensions, or tied into any archaic contracts. If so, it may be worth consolidating these old pensions into a newer one with lower charges.
Examine how much cash you’re putting in
Once you have calculated what your current occupational pension will offer in retirement, plus your state pension, you will have an idea of the kind of income you can expect in retirement.
In most cases, the initial sum will come as something of a shock, especially if you are in a defined contribution scheme. However, the key is not to panic and assume you will be stuck in work forever. Instead it’s important to think carefully about how much more you can afford to put aside – either in an occupational scheme or elsewhere – how much longer you can work, and whether you can generate the income you need for a comfortable retirement.
The Money Advice Service has a brilliant tool, which will help you calculate your projected income, and take steps to improve it.
You can now start drawing your pension while you are still at work – as long as you are over 55. Some funds let you draw part or even all of your pension before you retire. This is worth considering if you want to ease your way into retirement (perhaps by working part-time for a while).
To sum up…
Make sure you know – and take advantage of – the benefits of your current pension; work out what you have; calculate how much more you need to invest; and ensure that the money you put in is being invested in a manner that suits your circumstances. For more money making and money saving tips follow us on Facebook and receive a FREE copy of our most popular eBook ever! As soon as you’ve ‘liked’ us simply click on the eBook tab to the left of our Facebook page and download in seconds – it’s that easy!