The beginners’ guide to pensions

Posted on March 25, 2015 by Eleanor McKenzie
Happy Senior Couple on the Bow of a Sail Boat

Pensions are very much in the news this month, largely due to the significant changes that will become law in April 2015. After the Chancellor announced in the 2014 budget that anyone aged 55+ could start dipping into their pension pot, reliable pension information became a concern for us all. So here are some changes you might want to know about.

The New Age Change

At the same time, the government changed the State pension rules and the age we are eligible for it. If you reach State pension age on or before 6 April 2016, the current pension rules apply to you. This includes men born before 1951 and women with birthdays before 1953. If you’re born after those years, the new State pension rules apply to you. Essentially, if you’re in the ‘new rules’ category, you won’t receive your pension at 60 or 65.

If you’re in your early 50s and want to check the exact year you can hope to get your pension book (replaced by some techno gadget in the near future, I imagine) and how much you’ll be entitled to, then take this State pension test.

Check your national insurance contributions

The government says that the full new State pension will be no less than £148.40 per week. The amount you get depends on your National Insurance (NI) contributions and you need 10 qualifying years of contributions to get any pension. So, do check your NI contributions and enquire about supplementing them if you need to. Adding to your contributions is one of the ways to save for old age and it’s certainly something that freelancers like me may find very helpful.

Also, here’s a bit of information I wasn’t aware of, and which applies to a substantial number of those of us in our 50s now: if you continue to work after your pensionable age you don’t have to pay any more National Insurance. Plus, you can request flexible working arrangements, including flexitime, working from home and job sharing.

Defer your pension

You can also defer your State pension, meaning you don’t have to claim it when you reach pensionable age. If you reach pensionable age before 6 April 2016, you may earn extra money if you put off claiming it for five weeks. If you put it off even longer, your pension will increase by an extra 1% for every five weeks you defer it for. This is equivalent to 10.4% in a year. If you fall into the new State pension scheme, you will have to defer for nine-week periods. Still, it all adds up if you don’t need to claim it immediately.

Auto-Enrolment

Auto-enrolment is another new pension rule designed to help employees. You may have seen some advertising about the workplace pensions with the strapline “I’m in!” Not all companies offer a workplace pension and, according to Money Saving Expert Martin Lewis, only one-in-three UK adults are contributing to a pension scheme because of this. So, the government is enforcing the introduction of workplace pensions and by 2018, all employers will have to contribute to their employees’ pensions by law.

The tax advantage

Something else to consider when you’re making a pension decision is the tax advantage you have by putting your money into a pension, as opposed to any other form of saving scheme. You get tax relief based on whether you’re a standard or higher rate taxpayer. Whether you pay the contribution personally, or your employer pays it, the government puts 20% tax back into your pension pot. Higher rate taxpayers can claim an additional 20% to 25%.

A salary sacrifice

Another option is to make a salary sacrifice, which could give you a pension bonus. Often a salary sacrifice is used to buy things like childcare vouchers, but you can get your employer to put a set amount towards your pension. Because it is taken out of your ‘pre-tax’ salary, you pay a reduced rate of employee’s National Insurance, and so will your employer – an incentive for the employer to run the scheme!

How much should I put in?

The really big question is, how much should you put in to a pension? Well, Martin Lewis suggests you calculate it this way: Take the age you start your pension and halve it. Put this % of your pre-tax salary aside each year until you retire. So, those of you who started your pension plans in your 20s and early 30s had to put less aside each year. But, whether you started early or late, make sure you’re well-informed and do your research now; preparing for ‘pension-time’ is a priority, not something we can leave until the last minute.

by Eleanor McKenzie

Eleanor McKenzie is a Northern Irish writer with a passion for art, literature, and red wine. She's worked at advertising agency JWT, edited a journal for a European social policy think tank and tried to teach teenagers the difference between "there" and "their". Being 50+ has not significantly changed Eleanor's life, although she finds it a handy excuse when she wants to avoid anything too energetic.