Tiny: Pensions 101

January 12, 2024

What is a pension and how does it work?  

A pension is a long-term savings plan, it uses the savings you make during your working life to support you and your family in later life. And the aim is that by investing these savings early they grow and grow.  

Types of Pensions  

There are three different types of pension, and you can have more than one kind should you wish to. A state pension, a Workplace Pension AKA Auto-enrolment, at Marshfield we have scheme with NEST and a private pension plan which is a pension plan you set up and run yourself.  

State Pension:  

The State Pension is an amount of money paid by the government to the people who qualify when they reach State Pension age, this is currently 66 but is going to rise to 68 depending on your DOB. You build up your entitlement to the State Pension by making National Insurance contributions during your working life. You can also do this when you’re bringing up children or claiming certain benefits. 

The amount you get will depend on the National Insurance contributions you’ve made. The government will then pay you your State Pension – a guaranteed income – for the rest of your life. It’s important to remember that the State Pension alone is unlikely to be enough for a comfortable retirement. However, it could be a useful addition to your retirement income. 

Workplace pension: 

These days all employers have to have an Auto-enrolment scheme. A workplace pension is a savings scheme where your employer has enrolled you into their scheme, to be eligible you need to be aged between 22 and the state pension and have earnings greater than £192 per week and gone through your probationary period.  

If you’re a member of a workplace pension scheme, you and your employer will be contributing a proportion of your salary or wages to your pension pot. And the government will also contribute to your pension through tax relief.  

Currently, you the employee contributes 5% of  your pay and employer contributes 3%, so a total of 8%, so for every £100 you contribute the Govt adds £20. If you wish you can contribute more to the scheme, but the employer doesn’t have to contribute anymore, unless they want to. You have control of your pension pot, not the employer, we can only put money in.   

Personal Pension Plan:  

Personal pensions, stakeholder pensions and self-invested personal pensions (SIPPs) are all types of private – or individual – pensions that you set up with a pension provider yourself, you can have one of these on top of your workplace pension.  

It’s up to you, to choose the provider - as well as how often and how much you contribute (within the annual and lifetime limits).  

As with a workplace pension, the government will contribute to your private pension through tax relief. If you’re not sure which provider to choose, you can pay for financial advice or search online, but beware there are a lot of rouges out there so make sure they are an accredited financial advisor.  

When SIPPS were announced 10 or so years ago, a lot of people though they would use there pension to buy a second home, however the Govt stopped this as it would only make the Property Ladder even more difficult for people to get on, so NO to private houses but you can invest in commercial properties like shops or warehouses etc.   

All pension providers charge fees for managing a private pension. It's important you’re aware of the costs as they can eat away at your pot.  

If you’re employed, it makes sense to take advantage of your employer’s auto-enrolment scheme. If you’re self-employed or you don’t think your employer’s scheme is right for you, you might consider opening a private pension, but I would defo think twice before doing this, its better to increase you workplace contributions. 

Its Important to remember that the State Pension should be considered as a top up, as it’s unlikely to be enough on its own for a comfortable retirement. If you want a bigger pension then contribute more, the earlier you start the bigger it will be like all things the more you put in the more you will get out.  

When is the best time to retire & access your pension, in general terms its best to hold off from accessing your pension for as long as possible, this gives your pot as much time as possible to grow, It also depends on how long you want to keep working, I know everyone thinks they would like to give up work and sit around but in reality you need a reason to get up everyday. 

 Which brings us on to The 5 stages of retirement:  

  1. The pre retirement planning stage, its exciting when you are deciding all your options about retirement, when? Drawdown, what to do with you time  
  2. Then the honeymoon period when it feel as if you are on an extended holiday and everything is great  
  3. Then the disenchantment phase sets in when you feel detached from the working Populus,, everyone else is going to work and you are not, you’ve done all the chores around the house and fixed all those things that have been nagging you, you’ve been programmed to work all you life and now suddenly you’re not needed – you have low self worth you’re still relatively young fit and healthy and feel you’ve got something still to give but you feel no one wants you – depression quite often sets in 
  4. Then Slowly you start to re-orientate yourself with your new way of life and start to think about things in a different way, you aren’t governed by the working week anymore, days are just days – it doesn’t matter when you do things, you can do what you like when you want to.  
  5. Then piece by piece you build a new routine filling your days with worthwhile activities, could be part time job, working as a volunteer, playing a sport and you no longer give work a second thought and you start to feel content   

But it’s a tough old path and I know a number of people who have gone down this road with early retirement and struggled, so think carefully about early retirement. 

The earliest you can start to take money from your pension is 55, from 2028 this will rise to 57.  

When you reach 55 you may withdraw a lump sum, you can withdraw up to 25% tax free, obviously this does reduce what is left in the pot, you may wish to do this to clear any outstanding mortgage or debt you may have or go on a holiday of your dreams.  

If you withdraw more you will pay tax at the going rate, this is deducted by the pension company before you get the money, also it worth bearing in mind that whilst the withdrawal is tax free it will be considered as part of your income for that Tax year so it could put you in a higher tax bracket, so you might only want to withdraw a lesser amount .  

If you do withdraw money it doesn’t mean you’ve started taking your pension, it just allows access to some of your pot, it worth bearing in mind that if you don’t want your Pension to run out you shouldn’t withdraw more than 4%. 

The other to be aware of if you make a withdraw is the Scam Artists, there are lots of Scammers out there who want to part you and your hard earned Pension, with get rich quick schemes and unbelievable investment schemes, if it looks to be good to be true it often is, so avoid, for more information go to www.fca.org.uk/scamsmart  

Marshfield Pensions:  

The auto-enrolment scheme we have at Marshfield Ice Cream is NEST, The National Employment Savings Scheme, which is a Government Scheme, so your money should be safe. When you are enrolled by us, you will or should of received a letter from us stating that you are now enrolled in the scheme.  

You should shortly afterwards receive a letter/welcome pack from NEST confirming this and telling you how you can access your pension account – so being able to see what is in your pot and how it is growing.  

When you log in for the first time, you will need your Nest ID, which will be in the welcome pack, your date of birth and your National Insurance number   

In conclusion:  

Decide how long you wan to keep working  

  • Start as young as possible, the longer your savings have to grow  
  • Put in as much as you can afford  
  • Leave it as long as possible before you start drawing your pensions as it keeps growing 
  • This is only a brief guide, if you want more to know go to Pensionwise which is Govt run offering free and impartial advice , Pensionbee  or a reputable FCA accredited financial advisor or any of the many pension company websites, Standard Life being just one of them