Not all employees have to use their workplace pension, of course.
“We routinely move clients out of company pensions so they can have access to more funds and cheaper fees,” says Rebecca.
It is understandable that people get frustrated with multiple small pension pots as they move from one job to the next. We are likely to have many jobs in our lives: a 2018 study found that 43% of millennials planned on leaving their job within the next two years, and only 28% plan on staying in their job for five years. Rebecca says it makes sense to combine your pensions into one pot, if possible, as long as they are less than 10 years old. If they are more than 10 years old, it may mean that there are significant benefits in keeping them where they are.
“Just for peace of mind, it’s simpler and nicer to have one pot of money to look at,” she says. “Sometimes it’s financially sensible to bring them together, but it’s mainly a psychological benefit.”
If nothing else, having them all in one place saves you contacting multiple pension providers to let them know every time you move home or get a new phone number.
When it comes to the self-employed, there is no employer contributing to your pension, and you are not automatically enrolled into a scheme. You will have to choose and pay for a pension product yourself. The most common options are a personal pension or a self-invested personal pension. Both products charge an annual fee and can be found on most investment platforms.
Rebecca says that in her experience, freelancers are “renowned”, however, for having no pension at all, and she does not recommend that. A full state pension is currently just £164.35 a week – if you have paid national insurance contributions for around 35 years. It’s not much to survive on.
“I understand that freelancers’ cashflow can be lumpy, so normally I suggest paying a low monthly amount into a pension, a token amount, really,” she says, “then you can catch up at the end of the year, when you know how much you’ve earned and how much tax you owe.”
At the end of the tax year, business owners and sole traders can allocate a part or even all of their profits to their pension, and offset that amount against their taxes. (All of your profits or £40,000 – whatever figure is lower.) But how much should you contribute?
“It depends what your objectives are,” says Nicola. “If you’re buying a house in the next few years, for example, you might redirect that money to a Lifetime ISA or Help to Buy ISA instead.”
Whether you’re employed or freelance, watch out for costs. Although we mentioned free money from your employer and tax efficiency, a pension is not a free product. There are multiple fees, including an annual fee for the investment platform that the pension sits on, as well as an annual charge for the fund itself. Some providers have extra charges, for example £20 a quarter for administration.
“Costs are the number one thing that will drain your pension,” says Rebecca. “Other than that, pension products are pretty similar – they’re like a can of beans, some will be tastier than others. But it’s still a can of beans. Having said that, a pension can do you enormous favours. Think of it as the superhero for your future.”
If you have further questions about your pension, there are some good places to learn up. The Money Advice Service has a detailed section on pensions and retirement. The government website also can answer some of the more basic questions about your state pension. More general information, including on how to pick your own personal pension, can be found at the Citizens Advice website. If you’re employed and part of a workplace scheme, speak to your line manager or your HR department, which can do helpful things on your behalf such as update your details when you move house.
Of course, anyone can benefit from independent financial advice from an IFA. This is very important, especially if you want to transfer all your pension pots into one place, to make sure you avoid paying extra fees or losing certain financial benefits.