TL:DR If you pay part of your salary into a pension scheme and expect to live on that money when you retire, please find out how your pension scheme works and what benefits you are entitled to.
All schemes are different, and you will need a copy of your Member Booklet (may be online) to find out the relevant information. Some starting questions:
Is your scheme Defined Benefit or Defined Contribution?
Defined Benefit schemes provide pensions (and sometimes lump sums) where the amount is calculated according to a formula – based on your number of years of scheme membership and your salary.
They are more common in the public sector and for longer serving private sector employees.
If you know the rate at which benefits build up (called the accrual rate) and the salary that is used (sometimes final salary at retirement, sometimes average salary) you can estimate what your retirement benefits will be.
When you retire you will get a pension from the scheme paid for the rest of your life.
In a Defined Contribution scheme, contributions from you and your employer are paid into an account for you and invested until you retire. The amount you get at retirement depends on how much has been paid in and how well the investments have performed.
When you retire you will have the lump sum proceeds of your investments to live on. Alternatively, you can use the money to buy an annuity for a guaranteed income.
Defined Contribution schemes are more common in the private sector.
Members of these schemes should find out how much they and the employer contribute, and where the money is invested – to be sure the chosen investment suits you in terms of expected returns and risk of achieving those returns.
What protection benefits does your scheme provide?
Common benefits include:
Death in Service – schemes may provide a lump sum and/or pension (from a defined benefit scheme) for partners and children when a member dies while still working as a member of the scheme.
It is important to have nominated your preferred beneficiary for this death benefit, especially if you are not married.
Ill-health retirement – defined benefit schemes may pay your pension out early if you are unable to work anymore because of ill-health or injury.
Death after retirement – defined benefit schemes may pay your partner a lifetime pension after you die.
If you don’t join the scheme or decide to opt-out?
You will not be building up benefits for retirement.
You/your family will probably lose the protection benefits provided by the scheme.
You may not be able to re-join later for the same level of benefits, particularly if you are a long-standing member and the company has introduced a new (less generous) section since you originally joined.
You will save the contributions you currently pay in, however you will not save the full amount as you will need to pay tax on these contributions you’re now receiving in cash.
If you are thinking of opting out you should contact your scheme administrator to be sure you fully understand the implications of doing so.
Old pension schemes
You should keep track of your pension schemes from all your jobs so you can apply to receive the money when you retire.
Make sure they have your current contact details. All pension schemes, not just your current one, should provide you with an annual statement of your benefits.
If you have lost contact with an old scheme you can try the scheme administrator to see if they have your details. Or you can use the Pensions Tracing Service Find pension contact details - GOV.UK (www.gov.uk) to help you.
If you have lots of little defined contribution accounts you may be able to combine them all in one place.
How much do you need to retire?
This depends on lots of factors. The current state pension is £179.60 per week, but this is only paid if you have 35 years of NI contributions or credits, otherwise it is reduced prorata.
You may be entitled to NI credits if you’re not working – see National Insurance credits: Eligibility - GOV.UK (www.gov.uk) Either class 1 or class 3 credits will qualify for the state pension.
The state pension age for many of us looks like it will be at least 68.
Your workplace pension will be paid on top of your state pension entitlement, although the retirement age may be different. If you think you need more than you’re currently expecting, most workplace schemes will allow you to make additional voluntary contributions if you wish. Or you can use ISAs and other savings plans to save outside the pension system.
If you’re still reading I hope this helps you to understand your pension, it may be more valuable than you thought!
[Title edited by MNHQ at poster's request]