After working hard all week you may be only too glad to use some of the money you have left over after paying your bills to treat yourself – and why shouldn’t you? A nice meal out, a few drinks at the pub, a day out with the kids, or a shopping trip are the perfect ways to reward ourselves.
However, have you paid much thought to how you’ll treat yourself in the future when you don’t have a salary coming in anymore?
Pensions – are you prepared?
If you want to retire by a certain age, you’ll need money to support yourself when you’re no longer working. Life as a pensioner might seem a very long way off, but actually the sooner you start actively thinking about it and preparing, the better.
In the UK, people are entitled to the State Pension and any private pension they choose to set up, while recent changes mean you’ll soon be automatically enrolled into a workplace pension as well – if you haven’t already.
So, just why is it so important you’re part of a workplace pension scheme?
Basic State Pension
Before you decide whether or not a workplace pension is of benefit to you, you should take a closer look at the State Pension. Every person in the UK who has made or been credited with National Insurance contributions is entitled to the basic State Pension; up to a maximum weekly sum of £110.15*. However, with the new single tier state pension, set to be introduced in 2016, this will increase to a maximum of £144 per week. This roughly works out as just short of £7,500 a year – which is probably a lot less than what you’re used to.
That’s why it’s so worthwhile building another retirement nest egg to supplement your State Pension – and a workplace scheme can provide the perfect answer.
You may have heard of auto-enrolment but not have a clear idea of what it is. Simply put, it’s a new law that means UK workplaces must automatically enrol their employees into a pension scheme if they are aged between 22 years old and the state retirement age, and earn more than £9,440 per year.
Currently, companies are introducing auto-enrolment in stages depending on their size, but as the aim is for this to be completed by 2018, it’s likely your employer will have introduced it within the next few years – if they haven’t already. However, you do have the option of opting out – so should you take it? Of course, this is a decision only you can make based on your circumstances, but the truth is your future self may well thank you if you stay a part of it.
In it to win it
The great thing about a workplace pension scheme is that it’s not just you paying into it, but your employer too. Usually, a percentage of your wage is taken each month and paid straight into your pension. This percentage is then matched – or close to matched – by your employer, while tax relief from the government boosts it further still.
Let’s look at this example given by Gov.uk:
You pay in £40 each month
Your employer pays in £30 each month
The government adds £10 tax relief to this each month.
Monthly total: £80.
£40 isn’t a huge amount to go without each month – it’s probably the equivalent of one night down the pub. But all those payments add up to a healthy sum over the lifetime of the pension.
The best bit is that your employer is paying into your pension too, so effectively your contribution is doubled every single month (depending on the terms of the scheme you’re in). However, this only happens if you remain part of the pension scheme and don’t opt out of it. After all, you have to be in it to win it.
You might choose to set up a private pension that just you pay into as well, but it may still be worth retaining your workplace pension so you can enjoy the benefit of your employer’s contributions at a later date. It’s essentially free cash!
How – and if – you choose to prepare for your retirement is something only you can do. But if you’re struggling with the decision, ask yourself what sort of lifestyle you hope to have when you’re no longer working – the answer will probably make your choice a little easier.
*Information correct at time of writing (February 2014)