What on Earth is a pension?

[BodgingThisMumThing]

Okay so I know what a pension is, sort of. My dad works in finance and is very successful but if I ask him he tells me in terms I really don’t get.
So here’s my questions;
What’s a pension?
How much do I pay into it?
Do any of you have a separate savings account for your pensions?
If you claim child benefit does that mean you get a pension?
I see so many things on here about women not working and not paying into a pension pot. I am only 20 so thinking if I start young I’ll be okay, but there probably won’t be a state pension when I’m old. I’m about to start a new job, my first proper job since having my son at a well known company, who offer a pension plan and money on top of what I pay in.
Shall I start paying in now? I can probably just about afford to, but I’m so confused by the whole thing!

A pension is an investment account that you own that will provide you with money when you're retired (so can't earn any longer).

A private pension is effectively a separate savings account but has special status in the law (mostly to do with taxation). You pay into it yourself - often through pay deductions arranged through your employer. The current value of your private pension is called your "pension pot". You're not supposed to take money out until you retire.

A state pension is paid by the government once you're eligible through making enough National Insurance contributions (also money taken from your paycheque). Most people with a private pension will also get money through a state pension.

People pay different sums into a private pension but a typical range is between 5% and 10% of earnings. Sometimes employers make contributions too. The government encourages you to make payments by making most contributions exempt from income tax (so you get more pension for your money).

Claiming child benefit doesn't affect whether you have a pension or not (although it could affect how much you can afford to pay).

You can definitely start a pension at 20, and the earlier you start the bigger your fund will be on retirement. For women who might be taking time out of work to have children, starting early when you are earning is a particularly good idea. There is no one age that people start at - people have all kinds of different sized pots. But starting at 20 will put you ahead of most of your peers.

I'm not sure but under the new rules your employer might have to start a pension for you.

Right okay I think I understand. So I’ll definitely opt into the scheme at my new job, I think they paid 2.5% for every 5% I put in or something but will have a closer look.
I’m not sure if there’s a specific savings account with better interest rates specifically for a pension? I currently pay £400 a month into my savings account but maybe I should put some of that in a pension too. Very confusing, most of my friends have started to be told to sort pensions now, by their parents mostly so obviously it has massive importance. State pension isn’t very much? How do people live off that?

I'm less knowledgable than I'd like to be - but I've been paying in as much as my employer matches, into a workplace pension. There's a scheme called "salary sacrifice where I can put in 3% of my paypacket each month, and the company contributes an extra 4% (so in practice I get 7%). I figure while I'm young-ish and can afford to, it makes sense (I'm still pre-dependants). This money will come back to me as income after I retire. At a minimum you should always max out your contributions to get your employer to contribute the most. If they match your contribution up to 5% for example, contribute 5% as it's basically free money.

I'm 29 now, and joined my company at 23, so I have been working in a pensionable job for 6 years. I'm expecting to work for at least another 30, but eventually when I retire, I'll be living off a monthly pension packet. I'm assuming by then I'll have paid off my mortgage so my pension is for food, bills and living costs.

To have a nice retirement, and afford some travelling etc, ideally I'm aiming for about half of my current salary. My pension will put me on 2/3rds plus a lump sum.

I think you are right that state pensions might be a thing of the past when we're old enough. The state pension is currently about £600 a month. As well as a workplace pension, I think you can set up your own separately in a personal pension, which I want to look into. I'm also hoping I might have built up some savings, and even worked out how investments work and done some savvy investment deals!

If you can afford it, put the money in a pension. You don't pay tax on it, so it is worth more than the money you put in a savings account. You also don't pay tax on any increase (until you retire, when you might pay tax is your pension is big enough).
But remember you can't access the money until you retire, so if the washing machine breaks, you need to be able to replace it without touching the pension.

You do (or did) get state pension credits for the years you receive child benefit - so are/were assumed not to be working & not in a position to pay NI.

The maximum number of qualifying years used to be something mad like 20 (out of a required 30?) but they’ve increased the required years & reduced the qualifying years.

I think.

I’ll trh to find that out. Of course nobody currently knows what state pension provision will be like in 10/20/30 years time

@BodgingThisMumThing I’m not sure if there’s a specific savings account with better interest rates specifically for a pension? I currently pay £400 a month into my savings account but maybe I should put some of that in a pension too.

Without wanting to add confusion, pensions aren't like savings accounts (except they are savings accounts!). They are special accounts that you (usually) get organised via your employer and pay in directly from your gross salary - i.e. you never see the money in your hand, it is diverted straight into the pot. And your particular employer will put in 2.5% of their own money for every 4% you do - so in effect you are getting free money from your work!

The very rough rule of thumb is that you pay in half your age as a %. So you're 20, so you should pay 10% of your gross salary in. But most people can't afford that, so just do whatever you can - ideally whatever will mean the employer pays the max from their side, for that free money bonus.

You don't get a pension account on the high street* like an ISA or anything, nor can you get hold of the money till you retire
(* There are some available types pf pension, like SIPPs and whatnot, but for the purposes of clarity and ease, ignore them for now - you are more than likely going to be looking at a bog standard workplace pension)

You get state pension credits “until your youngest child is 12” - I’m pretty sure there is a limit on the number of years, but can’t find it.

(If you’re working & paying NI then it doesn’t apply anyway.)

Don't divert any of your savings into a pension UNLESS you have at least 6 months salary as savings AND enough for a house deposit (assuming you rent now and want to buy at some point).

Your employer will take your pension contributions from your salary, add in their contribution, sort out the tax rebate and put them into the pension scheme they have chosen. You don't decide how this is invested or anything. You may be able to add extra but you'd need to check the scheme.

Private pension schemes ie ones that don't go via your employer will cost money in terms of yearly management fees, but you can choose your pension provider. But as I said at age 20, unless you are a high earner with a shit load in savings i wouldn't bother.

You are aware that any pension payments, whether through a private scheme or through your employer, you won't be able to touch for 40 odd years?

Thankyou everyone, lots to take in. Shocked that you ought to pay in half your age, that’s a very high percentage!
Totally understand I can’t touch it until I’m of retirement age, I might die before then anyway so would never put loads and loads of money in a private pension pot. I just wondered what I’m meant to be doing as so many of mine and my friends parents are pushing us to sort it out, I think as they get to retirement age they’re shocked how little can be in there.

If you are unsure whether to put money into a pension or a house deposit then try a LISA. It has the tax benefits of a pension, but you can also use the money for a deposit on your first home. Money saving expert is a good place to read up on the basics.
In any case, if your employer is matching contributions then you would be mad not to take them up on it, unless it means going into debt. Your next employer might have worse conditions, so take full advantage!!!

If you are in the UK go to HMRC website enter your National Insurance number it will tell you how many years you have already contributed to a state pension, how many years you need to qualify for a full state pension and an estimated pay out per week in the future. You will the age that you will receive your state pension. If you want luxuries like holidays, car etc you will need to save your yourself via other methods like tax free ISAs, property, gold, art, premium bonds, private pension, shares, start your own business a combination of some of these...

It’s a really hard when you’re young to see money going out that you can’t touch until later life but the younger you start, the better off you’ll be. If you start now you’ll get used to the money going out. I started at 22 and I’m so glad I did because I’ve got a buffer now in my 30s that I could stop payments for a few years If I needed to. The free money from your employer is really valuable. Having seen elderly relatives in poverty, there is no way I’d want to live like that. Pensions are so important but lots of my friends have no or minimal provision in their 30s unless they’re in the public sector where the importance of the pension is ingrained.

Re the child benefit, if you aren’t working enough to pay National insurance but get child benefit then it counts as a year towards your state pension, but only for children up to 12 years old. You can log in to HMRC and check your National Insurance record, I don’t know what details it needs to start with but it’s useful to keep an eye on it and make sure you have enough qualifiying years for the state pension.

www.gov.uk/check-state-pension

Thankyou! Filled it in and it says I’ve been paying contributions for 4 years, 2 years of that was full contributions.
And I need to keep paying for another 48 years, how lovely
Will it show up how much I’ve personally contributed through my salary and the extra my employer adds? Or is that somewhere else?

The 48 years is probably how long left you have to contribute, not how many you need to contribute for. I have 31 years left in which I can contribute and need to contribute about 18 years within that time. As you are only 20, you have 48 years before you reach state pension age but don’t have to contribute all of those!

bodging the link checks your state pension, so is relevant to your NI contributions (national insurance). Your employer will pay some too. The amount paid in will depend on how much you earn, and is fixed by law, the amount you get will depend on the number of years you pay in. So it is not quite as simple as £x in £x out.

On top of that, as an employee you will be automatically opted in to a personal pension- which is £x being invested on your behalf, (until you reach the retirement age) with favourable tax rules to help. Your employer will contribute x% of your salary, and so will you. You can choose how much you put in, and your employer may or may not match it. If they will match it then you are throwing away free money if you don't take them up on it!

Once you have that six months savings cushion, max out your pension. To do otherwise is turning down free money.

Set up an expression of wish so your kid benefits if you dont.

I started my pension at 21. Don't need it yet but thirty plus years of payment and growth means a reassuring sum.

I do a lot of work in/with this sector and I cannot emphasise how important it is to contribute from an early age. It makes it disproportionately easier to get a good income in retirement as you let compound interest do the heavy lifting.

Great that you are thinking about it now. We are on average living much longer than anyone ever thinks they will live to so do save as much as you can, as early as you can.

And if you die before state you start using your private pension (but before 75) your pension pot does not form part of your estate and so no inheritance tax is paid on it.
You must fill out the expression of wish form though.

Don’t forget the tax relief ie free money from gov. It’s equivalent to your tax rate so if you are 20% tax rate payer you get 20% (free) money paid into your pension. Eg. If you want to pay £100 in conts you pay £80 and gov pays £20. (It’s done through pension provider automatically at 20% so you only need to do tax return when you are paying higher rate)