The Daily Observer London Desk: Reporter- Victoria Smith
A full state pension plus a decent work pension are the main building blocks of a comfortable retirement for most people.
To max out your state pension you simply have to pay National Insurance for at least 35 years, or either qualify for free NI credits or buy top-ups to fill any gaps if you fall short.
Work pensions are a bit more complicated than that. Auto-enrolment is designed to remove some of the hassle, meaning if you start early it is possible to save a good-sized pot without a huge amount of effort.
But if you really want a richer retirement, you need to save more and take an active interest in your work pension. We explain how to make the most of it.
Free money: You get handouts for saving into a pension from your employer and the Government
What are the benefits of a work pension?
The pensions you accumulate over your working life can become a very valuable asset – usually second only to your home, should you own one.
A key thing to keep in mind is that you get a boost for saving into a pension that is unlikely to be matched elsewhere.
The money you put in any pension is topped up by the Government with pension tax relief, and you get extra cash from your employer as well if it’s a work pension.
For example, pensions savers get a 25 per cent uplift to money they pay in to take them back to the position before basic rate tax, turning £80 back into £100. Meanwhile, many employers will match pension contributions.
A worker on £35,000 a year taking full advantage of their employer matching pension contributions up to 5 per cent would pay £1,750 a year into their pension, or £146 per month. Their employer would pay in the same amount and tax relief would deliver a 25 per cent uplift on the worker’s contributions.
This means that in return for the worker’s annual £1,750 contribution they would get £3,938 a year into their pension.
Avoid pensions entirely, and you get none of that free cash.
Opt out of your work pension in favour of contributing to a personal pension or Lifetime Isa instead, and you still get some Government tax relief, but will lose the extra cash from your employer.
Many people save outside work pensions for good reasons, such as the flexibility and wider investment options of a self-invested personal pension (Sipp), or the convenience of saving for both retirement and a first home with a Lifetime Isa.
These are good retirement saving options for the self-employed, although a self-invested personal pension still arguably beats a Lifetime Isa for them.
But if you are employed, and you are not already squeezing the maximum contributions possible out of your employer for your work pension scheme as well, you’ll be throwing away the free money that’s available.
Below, we explain work pensions, what checks to carry out, and how to get the most out of them to be better off in retirement.
