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Nov 25

What is a pension and do I need one?

Reading Time: 5 mins

We recently collaborated with leading pension provider PensionBee to bring you six podcasts all about pensions. These podcasts cover the basics as well as looking in depth into different types of pensions.

In this episode of the How To Be A Money Magpie podcast, founder Jasmine Birtles is joined by Angela Kirkwood from MoneyHelper, and Isobel Lawrance, from MoneyMagpie’s very own team! They go back to basics and discuss what a pension is, and whether you need one.

Listen to the podcast below, or read the written summary!

What is a pension?

Angela says:

“Right now, you get a salary, and you are likely paid every month. When you stop working, or want to reduce your hours, a pension is the wage you get when you have retired, or cut down your work hours.

The big question is; who pays that wage? We go back to the savings account that you put your money in to build that pot until it eventually becomes your wage when you retire.”

 

What is the state pension?

Angela says:

“The state pension is a benefit the government put in place so when you are older, and either don’t or can’t work, that you have enough money, at least, to pay for the basics.

Because it’s a benefit, you have qualifying rules. You must have reached a certain age, have paid at least 10 years of national insurance contributions, and if you want to get the full amount, you need to have paid 35 years of national insurance contributions.

The thing to remember is, it’s never going to be paid before your state pension age. At the current rate, it’s £9,300 a year. So, if you want to do anything over and above the basics, that’s where your own private pension comes in.”

 

What’s a private pension?

Angela says:

“Your private pension is money you put in through your employer or by yourself. You can access this money at a later date. You can access it before the state pension age. So, if you want to retire slightly earlier, your private pension comes into play.

It also means you have an amount of money to live on over the state pension amount.”

 

As part of ‘Gen-Z’, is this what you thought pensions to be?

Isobel says:

“We’ve never been taught anything [about pensions] in school, uni, never until I started working full-time. Even then, I didn’t have a clear idea of what that meant.

To me, it was pensions, retirement, it all seems so far away. But it’s important to start thinking about it sooner and it’s also important to understand there is a private and a state pension. A lot of people my age wouldn’t know that there was two types and it’s definitely important to be aware of that sooner.”

 

Do you think a pension is worth having?

Isobel says:

“Definitely. I thought it was so far away into the future that I didn’t need to think about it. But there’s nothing wrong with getting ahead of the game and starting early.

With a private pension, every little helps. Even If you’re only adding a small amount every month, it will build up over the years. I’m really happy I’ve got one now.”

Jasmine says:

“Because of your age, the compound interest will build and build over the years. You could be sticking a tenner in each month and that’s going to really build up to something really impressive.”

 

Are pensions more popular now?

Angela says:

“Since 2021, employers have had an obligation to A) have a pension scheme, and B) put their employees into it. It’s called auto-enrolment, and what it means is an employer takes an amount of money from an employees’ salary every month, then the employer puts a contribution into the pension as well.

You have the right to opt out, but it’s meant an extra 10 million people are paying into a pension. In previous years, if you had to consciously make the effort sign up, it would never hit the top of your to-do list.”

 

Are people aware of the “free money” aspect?

Jasmine says:

“Like you said, an employer will put in some money, and what you would have been taxed on your pension contribution, the government outs that into your pot, too. So in that sense, it’s free money.”

Angela says:

“I don’t think people think of it. As part of the pensions industry, we should make this more prominent to people. Yes, you are putting money in. But for every pound you put in, your employer is topping it up more.”

 

Do young people you know have pensions?

Isobel says:

“A lot of my friends have the auto-enrolment, but again, none of us were taught what it all means. What do employers contribute? What do you personally contribute every month?

I think it is important auto-enrolment happens, but also that people are told what it means for their income and what it means for their future. I think a lot of my friends are unaware of what they’re paying into and why.”

 

What is the opt-out rate?

Angela says:

“The system was very clever, designed to be an effort for people to opt-out. Fewer than 10% of people opt-out. Surprisingly, people in their 20s and 30s opt-out at the lowest rate. They think pensions are just a thing you do.”

 

How do pensions make money?

Angela says:

“You should get a statement once a year that will tell you how much you have. My advice is: get to know your numbers.

Your statement will tell you how much you have put in, how much your employer has put in, and how much the government has put in. It will tell you what your pot was the previous year, and the updated total. You can see it growing.

The important things with pensions are how long you invest and how much you invest. With compound interest, you are making growth on money that has already grown.”

 

Where can you see all your contributions?

Angela says:

“There is something being built called the pensions dashboard, but that won’t be ready for a year or two. Once that’s built, it will show you all of your pensions.

You may have online access to your pensions currently, where you can log on and look. You can also contact your provider.

At MoneyHelper we are free, impartial and we can answer your pensions questions. On there, there are calculators where you can see what differences putting more into your pension will make, and how much you will have to contribute if you want to retire at a certain age.”

 

How do you know what your money is invested in?

Angela says:

“You can contact your provider and you should be able to find out what your money is invested in. Most people invest in a default fund. That fund is designed for your whole pension scheme.

If you are younger, you may be able to take more risk. You might want to change your investments. That’s not to be done lightly, you need to be sure that you know what you’re doing.

Most schemes will have options. It’s worth doing a bit of digging.”

 

How much should you put in?

Angela says:

“I always say, put in what you can afford. I would advise people to use MoneyHelper calculators and do the numbers. See what a slight difference might make.

If you get a wage rise or bonuses, see if you can afford to put a little bit of it away. It’s easy to put some away and get into that habit.

If you want to put one-offs in you can. Similarly, if you increase your input by £5 a month, you can also reduce this later on if you need to.”

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