To help you better understand pensions, we’ve teamed up with our partners in the Starling Marketplace, PensionBee and Penfold. Here, we run through what you need to know.
1. The most common types of pension
State Pension - This is a regular payment from the government to you, which you can claim when you reach State Pension age.
To receive the minimum State Pension, you must have paid National Insurance contributions for at least 10 years by the time you reach State Pension age (currently 66). To receive the maximum amount (at time of publication worth £179.60 per week, set to rise to £185.15 in April 2022), you must have contributed for at least 35 years.
Workplace pension - This is usually arranged by your employer. A percentage of your pay is put into the pension scheme automatically every payday. In addition, you’ll usually receive contributions from both your employer (a minimum of 3%) and the government (in the form of tax relief).
Private/Personal Pension - Both Penfold and PensionBee offer private pensions. It’s an alternative or additional pension to a workplace pension. You are able to pick a fund that best suits you and a fund manager will manage your investments for you.
Self Invested Personal Pension (SIPP) - This type of private pension gives people more freedom over how they invest their pension. For example, with most private pensions you pick a fund and then the fund manager manages the investments for you, whereas with a SIPP you can pick and manage your own investments.
When investing in shares your capital is at risk and you could get back less than has been paid in.
See more information on the types of pensions.
2. Time is your best friend when it comes to pensions
The earlier you can start paying into your pension, the better.
Not only does starting earlier give you a longer time period to save but also the longer you leave your money to grow, the more chance it has to build over time.
Your pension is a long-term investment and like most investments, the value can go down as well as up and you could end up getting back less than what you originally invested.
If your pension does make a return and grows, that growth can cause even more growth because your returns will be reinvested and could compound over time. The longer time period your pension has to do this, the bigger your pension pot could become.
Both PensionBee and Penfold have handy calculators that can help give you an idea of how your contributions over time might impact your pension.
3. Free money from the government - yes you read that right!
When you contribute to a personal pension, you will usually benefit from tax relief. Basic rate taxpayers (£12,571 to £50,270) usually get a 25% tax top up, which means that for every £100 you pay into your pensions, HMRC will add an extra £25. Most pension providers automatically claim the basic rate tax relief on your behalf and add it to your pension pot.
Higher and additional rate taxpayers can claim a further 25% and 31% respectively through their Self-Assessment tax returns.
For 2021/22, you can get tax relief on pension contributions up to £40,000 or 100% of your salary (whichever is lower) if you earn less than £240,000. Any contributions that you make over this limit are taxed at the highest rate of tax you pay. These figures may change with the March 2022 government budget, but don’t worry, we’ll keep you updated.
Below you can see how much tax relief you’ll receive in your pension and back in your pocket after making a £100 pension contribution, depending on what tax band you’re in.