Why are pensions so complicated? I’ve spent the last twenty years trying to demystify pensions for people, but I have to admit, the whole sector is still far too hard to understand.
Sadly, many people still don’t understand even the basics of pensions. Lots of the readers I speak to have watched their pension pot reduce due to commission and charges taken by the pension provider. Others take an annuity out with the same holder of the pension, despite the fact that much better deals are out there with other annuity providers. And most of us don’t move our pension pots to other providers either.
The good news though is there are loads of new financial firms that can help you find a better pension deal even if you don’t have much in your pot. And it’s not that hard to track down missing pensions from former jobs too. Here’s how to get started.
Let’s take a look at the three main types of pension first.
- The state pension. This is the pension you get from the state (or Government) and is drawn from your National Insurance contributions over your lifetime.
- Your workplace pension. This is the pension you have through your workplace. You can usually contribute extra into it and the pension provider should send you a statement every year showing you how it’s doing – even after you’ve left the business.
- A private pension. These are pensions you set up yourself. They often come with tax benefits and are a really useful way to save for retirement – especially if you are self-employed.
How much money will I have when I retire?
Firstly, the retirement age is not set in stone – and I’m sorry to say that if you’re under 50 you might have an even longer wait to get your state pension.
The age when you get your state pension is currently 66 – but that’s going up to 67 for those born on or after April 1960 and again to 68 between 2044 and 2046 for those born on or after April 1977. Chances are this could change again though, if the cash looks like it’s going to run out in the future.
So it makes sense to have alternative plans for your retirement. This can be a scary business. Many of the people I speak to are in total denial about their retirement income. Taking a cold hard look at your current pension pots can induce a bit of panic. But let’s be frank: better to face down your finances rather than wait till it’s too late.
Don’t just rely on a pension though. Savings and investments can all help you meet your retirement needs. It makes sense to speak to a financial adviser if you don’t know how to get started. They will charge you a fee, but it’s worth it to help you navigate the rather complex world of future savings. Why not speak to a friend or family member and ask them if they have any recommendations. Make sure you ask about costs and commission – and what you’re getting for your money.
How to find lost pensions
Here’s a nice, easy way to get started. The Pension Tracing Service is a completely free service that can help you track down a missing workplace pension. This matters because many of us will change jobs repeatedly in our working lives – and as a result you can struggle to find old schemes you’ve paid in to. The Pension Tracing Service can help you by trawling through 320,000 pension schemes. It’s dead easy, so get started here right now! https://www.gov.uk/find-pension-contact-details
It’s estimated that just under £20 billion is lying around in ‘lost’ pensions, waiting to be claimed. However, wherever there’s easy money waiting to be claimed, there are businesses that will charge you for doing something you can do yourself for free. So watch those Google ads and stick to the official tracing service mentioned above.
How is my pension doing?
Both private and workplace pensions should send you an annual statement showing how the pension is doing. These documents might not always make much sense but don’t pop them in the bill drawer and forget about them. Ask questions from the pension provider and get them to put things into plain English for you. They’re taking fees for managing your investment – so make them earn their money.
Your HR department at work should be able to tell you what you’re entitled to pay in to your pension on top of your extra contributions – and what the tax implications are. Book an appointment with them, particularly if you’re over thirty and are thinking long-term.
There are loads of ‘sliding scale’ guides showing what you should be paying into your pension if you want various incomes at retirement. These can be really scary to the casual observer. But don’t forget that it’s never too late to save more into a pension, and you can get tax breaks too, or even save money on commission by moving providers in some instances.
The free Money Helper website (formally the Pensions Advisory Service) has tons of useful information on all things pension on their website in straightforward terms. I think it’s a fantastic place to start if you want to learn more about pensions and savings. https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics
Pension payouts – and scams to watch out for
A few years back, the Government ‘liberalised’ the pension rules, which suddenly meant you could withdraw most of your pension pot when you hit 55 (expect this age to go up too). You can take out 25% of your pension tax free, though if you want to go for it
As for the remaining 75%, you’ve got a few options:
- You can take some or all of it out as cash – but the tax bill can be huge.
- You can buy an annuity – a regular payment that pays you an income for life.
- There are also other investment opportunities too.
Rather unhelpfully, a Government minister trumpeted the new rules by suggesting people could go out and ‘buy a Lamborghini’. This didn’t go down well in the media or with financial advisers. It’s really, really important you take regulated financial advice when making a decision with your pension. Don’t go mad and blow it all.
Which brings me to scams. With people suddenly able to get large sums of money overnight, fraudsters stepped into the mix. The advice here is really simple. Businesses are banned from cold calling you about pensions. So if this happens hang up – it’s likely to be dodgy.
The scams work by pressuring you in to either transfer your pension to another fund (which charges commission but doesn’t necessarily benefit you) or by getting you to invest in fake or rubbish ‘get rich quick’ schemes. I can’t make this any clearer – don’t do it! Don’t even invest a pound with someone who cold calls you.
Featured in Mirror – Martyn James