11th September, 2023
We’re all working hard to save for our future and ensure financial stability, especially nowadays as the cost of living continues to increase. However, many people are unfortunately out of the loop when it comes their own pension – in fact, it’s estimated that 75% of adults in the UK don’t even know how much is in their pension pot.
This year, the 10th annual Pension Awareness Week will be taking place from September 11th until September 15th. Over the last decade, the purpose of this event has been to help people financially plan for their future and better understand their pension.
In simple terms, your pension is a long-term type of saving pot that you build up during your working life, with the point being to create yourself an income to sustain yourself once you reach the age of retirement and stop working. Two of the most well-known pensions are workplace or personal pensions.
You can opt-in to a workplace pension when you start working, and your employer will also contribute to your pension each payday. The minimum contribution is currently 8% of qualifying earnings – of this 8%, your employer must pay at least 3% (although some employers may decide to contribute more), meaning you pay the 5% that remains.
Qualifying earnings are the minimum basis for calculating workplace pension contributions. The lower and upper limit for these earnings are calculated and reviewed by the Department for Work and Pensions (DWP) each fiscal year. For the 2023-24 tax year, the lower limit for qualifying earnings is £6,240 annually (£520 monthly), and the upper limit is £50,270 annually (£4,189 monthly).
A personal pension is one that you arrange yourself and make monthly contributions, or you can opt to deposit a lump sum that the provider will then invest on your behalf.
Your pension will be invested into different things whilst you’re working and contributing, such as companies and property. These investments are intended to help the pension grow whilst also benefitting from compound interest (where the interest you’ve already made on your savings will also earn its own interest), so that you have more than what you actually contributed by the time you come to retire and withdraw your pension.
The age at which you can withdraw your pension is currently 55, but this is set to increase to 57 in April 2028. You can withdraw your pension early if you want to, but it’s highly discouraged unless you meet certain conditions such as poor health or a serious medical condition. If none of these conditions are met then it will be considered ‘unauthorised’, and you’ll be charged up to 55% tax on your withdrawal by HMRC.
Many pension providers are unlikely to help with releasing your pension early due to this, so you could have to go through a third-party who may not be authorised by the FCA and therefore won’t be protected in the event that something goes wrong. There is also the possibility of falling victim to pension scams when trying to withdraw your pension early, so it’s best to never trust any third-party acting on your behalf when it comes to your hard-earned pension.
Not to mention that by withdrawing your pension early, you risk running out of funds earlier and therefore having to work longer than anticipated.
Different employers may use different workplace pension schemes, so if you’re moving jobs then don’t forget about the pension contributions that you’ve built up whilst working for your previous employer. Many people forget to transfer their pension pots and instead leave them to eventually be forgotten. It’s estimated that over £19 billion – yes, billion! – is ‘lost’ in UK pension pots that have since been forgotten.
Although the pot is still in the workers name and can still be claimed upon retirement, there are issues that can arise and make the process much more complicated, such as the person moving home and not letting the pension provider know.
If you’re unsure whether you have any lost pension pots that are waiting to be found, you can use the government’s free pension tracing service here.
Written by: Shannan Errington
*Please note that the above information has been gathered through secondary research. The information provided is not based on our opinion. You should seek further guidance and information before making an informed decision.