Nearly one in five people aged 55 or over have no private pension savings, but it’s never too late to start setting some money aside for retirement.
According to research by Unbiased.co.uk, the website which matches people to financial advisors, 17% of those aged 55 or older admit they have no pension other than the State Pension, which currently pays out a maximum of £10,600 a year. Despite this lack of pension provision, nearly half of those questioned said that they were hoping for a retirement income of at least £20,000 a year, with 61% hoping for at least £10,000.
Don’t assume that if you’re in your fifties or sixties that it’s too late to start paying into a pension for the first time. Even setting aside a small sum each month could make a big difference to your retirement income when you stop work.
Here, we explain why pensions are so important, how to go about choosing one, and how to work out how much you should pay in.
If you’re thinking about getting independent financial advice, financial services company Fidelius is offering Rest Less members a free initial consultation with an independent financial advisor to chat about your finances, where you are now, and where you want to go.
There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Fidelius is rated 4.7/5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
Why pensions matter
One of the biggest benefits of a pension is that the taxman boosts the amount you pay into it. For example, if you’re a basic rate taxpayer a £100 contribution into your pension will only cost you £80 thanks to government tax relief. If you’re a higher or additional rate taxpayer the same contribution will only set you back £60 or £55.
Is it too late to start a pension?
Even if you’re in your fifties or sixties and are hoping to retire in the next few years, don’t assume that it’s not worth starting a pension now. Arguably, it’s even more worthwhile paying into one if you’re planning to stop work relatively soon, as you’ll still qualify for tax relief on your contributions up to the age of 75 and you’ll also be able to access your pension savings (including the top up from the taxman) much sooner than someone who’s in their twenties or thirties.
Even if you’re not earning enough to pay income tax, you can still get basic rate tax relief on pension contributions of up to £2,880 each year. So if for example, you’re currently out of work, your partner might decide to make pension contributions on your behalf until you find a new job. You can find out more about this in our article Can my husband or wife pay into my pension? and in our guide to How pension tax relief works.
How to set up a pension
How you set up a pension will depend on your employment status and whether you’re employed or work for yourself.
Setting up a pension if you’re employed
If you’re employed, your employer should have automatically enrolled you into a company pension scheme, into which both they and you must contribute. Under current rules, anyone aged 22 or over earning a minimum of £10,000 from a single job is eligible for auto-enrolment. You can choose to opt out if you want to, but it’s not usually recommended unless there are exceptional circumstances, for example, you need to pay back expensive debts first.
If you’ve been auto-enrolled into your employer’s workplace pension scheme, under current minimum contribution limits, you’ll be paying in 5% of your salary before tax (of which 1% is tax relief), whilst your employer will pay in 3%, bringing the total contribution to 8%. Your payslip should show any pension contributions that are deducted each month and if you’re not sure whether you’ve been auto-enrolled, check with your employer.
Some employers will pay in more than the minimum contribution, and you can pay in extra if you want to. You are also able to make additional one off voluntary contributions into a workplace pension at any time and still receive any tax relief eligible to you – simply call your pension provider and speak to them about the options available to you. Find out more about auto-enrolment in our guide How does pension auto-enrolment work?
If you earn less than £10,000 a year, perhaps because you work part-time, you can still ask your employer if you can join the company scheme and they can’t refuse. However, bear in mind that if you earn less than £520 a month, or £120 a week, your employer doesn’t have to contribute to your pension. Find out more in our article Can I join my workplace pension scheme if I’m on a low salary?
Even if your employer contributes into a workplace pension on your behalf, you are still able to take out a private pension on your own to supplement your pension – providing you stay within your annual contribution allowances.
How to set up a pension if you are self-employed
If you’re self-employed, it’s up to you to make your own pension provision and there are several different types of personal pension to choose from. Whichever type you choose, your money will get invested, and the amount you end up with when you retire depends on how much you’ve paid in and how your investments have performed, once any charges have been deducted.
Types of personal pension include Self-Invested Personal Pensions (SIPPs) which usually suit confident investors who are comfortable choosing and managing their pension investments themselves. You can find out more about how SIPPs work in our article Everything you need to know about SIPPs. There are also Stakeholder Pensions, which allow you to make small contributions starting from £20 a month, and to stop and start these if you need to. Your money is usually invested in a default fund, unless you request otherwise.
If you’re looking for a relatively hands off approach, several providers offer a range of “ready-made personal pensions” for you to choose from. With this type of service, you sign up for a personal pension and then choose from a range of ready-made pension portfolios designed to suit different approaches to risk. Make sure you read the small print carefully before signing up and remember that there will still be fees involved. The right one for you will depend on your investment timeframe and approach to risk, but you should seek advice if you’re unsure how to proceed. Find out more about risk in our article What’s your attitude to risk?
How much should you save into your pension?
The simple answer to how much you should save into your pension is as much as you can afford, without leaving yourself financially overstretched. This amount will be different for everyone, but the more you can put away, the greater the chance you’ll be able to enjoy a comfortable retirement.
Some experts suggest that halving your age and then paying this percentage of your monthly wage into your pension each month for the remainder of your working life is a good goal to aim for. That means if, for example, you’re currently aged 55, you should try to put away 27.5% of your income before it’s taxed each month until you retire. If you’re earning £2,500 a month, that means you should ideally aim to pay £687.50 of this a month into your pension (27.5% of £2,500.)
You can learn more about how much you should be putting away in our article How much should I save for retirement?. Bear in mind that the amount you can pay into a pension and earn tax relief on is capped each year, known as your Annual Allowance (this is currently £60,000). Find out more about pension allowances in our article Understanding your pension allowances.
If you’re thinking about getting independent financial advice, financial services company Fidelius is offering Rest Less members a free initial consultation with an independent financial advisor to chat about your finances, where you are now, and where you want to go.
There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Fidelius is rated 4.7/5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
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