How do I know if I’ve got a good pension?
Published 2 June 2015 by Emily Bancroft
If you are working you need to pay into a pension, but what are the options?
We all know that we’ll need some sort of pension for when we retire, but how much thought have you given to the pension plan you’re paying into? Are all pensions pretty much the same, in that you save money now to spend when you retire, but is yours really performing for you? Take a look at our guide to the different types of pensions available.
You build your state pension throughout your working life through your National Insurance contributions and at times, you might have been annoyed that the money was going out of your pay every month rather than into your wallet! But when you’re retired, you’ll be grateful for it. If retirement is far away, you might not give too much thought to your state pension. Currently, the maximum you can get is £115.95 a week, which doesn’t seem much, but while you might not be planning on living on this alone when the time does come, it’s important to keep up to date with it and know how much you’ll get from it.
This calculator on Gov.uk lets you know how much you’ve paid into your state pension, when you’ll be able to start claiming it, and the amount you’ll be able to get. It’s likely that you’re going to need more than this to have a comfortable retirement, which is where a workplace pension or personal pension come in.
Also known as occupational pensions, most employers now have to automatically enrol you in a workplace pension if you’re not already in a pension scheme through your job. If you’re over 22 but younger than the state pension age and earning £10,000 or over a year, your employer will enrol you into their workplace pension. You can opt out if you want too, or ask to pay a lower amount into it if your employer allows it.
Typically if you make a contribution of 1% of your pay, your employer will match it with an additional 1% that they contribute.
Your workplace pension is likely to be one of two different types, defined contribution or defined benefits.
Defined contribution – what you pay in is directly linked to what you get out. These are more common in the private sector and you’re not guaranteed any particular level of pension.
Defined benefits – these used to be more common and meant that you’d get a set amount on the day you retired, and you didn’t always have to pay in yourself. They’ve become much rarer now as many employers have closed their schemes and moved to defined contribution schemes, which are cheaper and less risky for them, but public sector pensions are usually a type of defined benefits schemes.
As a public sector worker, you’ll usually be offered a set level of pension when you retire, which may be guaranteed to rise in line with prices. Your employer will pay in for you, but you’ll usually be required to pay into your pension now too. If your employer offers you a defined benefits pension, this is likely to be the best deal you’ll be able to get.
Personal pension- A personal pension is usually provided through an insurance company – you can set one up yourself independently of any employer – for example if you are self-employed. As with a defined contribution occupational pension you pay in a set amount every month, which is invested on your behalf. You’ll usually be offered a choice of investments – which ones you choose depend on how much risk you’re prepared to take with your money.
Other pensions – if you’ve worked for more than one employer, you might have a few different pensions. Use the government’s Pension Tracing Service to find out about them.