A pension is an amount of money that has been saved. It's accumulated throughout your working life and is there so that you still have income once you leave your job and retire.
Currently in Scotland, the retirement age is 65 for men and 63 for women. This is planned to raise to 67 for all by 2028.
A state pension is the pension paid by the government.
To get access to the state pension you must have ten qualifying years. A qualifying year is a year of working either for a company or as self-employed where National Insurance payments were made.
Companies usually deduct a National Insurance payment from your salary whereas a self-employed person will have to arrange payments themselves.
If you're unemployed, it is still possible to accumulate National Insurance credits and sometimes these are deducted from certain welfare benefits. Whether employed or not voluntary National Insurance payments can be made.
When you meet the retirement age, the government will start to pay this pension depending on how many National Insurance payments were made.
For the best state pension, thirty-five qualifying years must have been worked or the equivalent National Insurance payments made. State pension payments are usually paid every week into your bank account. If you want to keep working after your retirement age then you might want to delay the start of your pension and earn more towards it.
A workplace pension is a way of saving for your retirement with an employer.
If you're part of a workplace pension scheme a percentage of your pay is deducted and put towards a pension plan. Your employer will also pay towards the pension depending on how much you pay in.
All employers are obligated to provide a workplace pension scheme if you are:
- a worker,
- aged between 22 and state pension age,
- where your salary is greater than £10,000 a year and you work in the UK.
The government will help pay towards a work pension in the form of tax relief. That means that some money which would be paid as tax to the government is added to the pension scheme when payments have been made. Different companies will pay in different amounts to your pension pot, so you should speak to your employer about what scheme they have in place.
It is possible to un-enroll from a workplace pension but is highly discouraged. It's really beneficial to pay into a workplace pension plan due to the added funds from the company you work for and what the government pays in. It's not possible to receive refunds of payments made towards a pension scheme after a certain sum has been accumulated normally this is only between a few hundred to a thousand pounds or less.
Private or Personal Pension
There are two types of private pension.
1. Defined Contribution Pension Schemes (Money Pensions)
Money is paid privately or by employers in the form of investments.
The value of this pension pot will fluctuate depending on how well the investments are doing on the market so there is more risk. Some schemes can move the money to a lower-risk investment when nearing retirement age, meaning that investments using your money are made only where it's very likely to return a profit.
A benefit of this investment is that it’s usually 25% tax free. Which means that you wouldn't have to pay any interest on 25% of your total pension pot when you start receiving payment. When you reach retirement age, you can decide whether to take the pension pot as a lump sum or as monthly payments. There is usually a small fee taken by the pension provider.
2. Defined Benefit Pension Schemes
Also known as 'final salary' or 'career average' pension schemes, these pensions are arranged by your employer.
Unlike a workplace pension, this pension doesn’t depend on how much has been paid in.
This pension can be based on multiple things such as the your average salary and the time you've spent working at the company. The provider will pay a certain amount out each year when retirement age is met. Like other pensions, there is usually a 25% tax break.
Why is it important to start a pension pot?
The place you start saving for a pension is often referred to as your pension pot. It's possible to have multiple private, and workplace pension pots with different providers, but you can also transfer any funds from one pot to another relatively easily, which makes it easier to track how you're doing.
Whilst everyone gets a state pension, the limit to how much you can get per week, is £175.20 unless you've contributed extra on your own, or if you delay your retirement age.
Saving for 30, 40, or 50 years into the future might seem a little extreme and something you could put off for a bit - but whilst you're working it's a good idea to think about how you might want that retirement future to look like - because the earlier you start putting the money aside - the better your retirement will be!
Further Information About Pensions
Get more information about money management at Money & Me.