Why are pensions so important?

So lets take brief look at what a pension is and why it is so important to you.

Pensions are of course pots of money saved up over your lifetime that is invested in various different types of investment instruments and over time hopefully increases so when you retire, you can either draw down a lump sum, or recieve a regular payment for it.

There are many different types of pension, but I will explain the most common ones here.

The State Pension

If you have worked or claimed state benefits then chances are you have paid national insurance contributions. You may think that you are paying into your own state pension pot for when you retire. However this is not true. The national insurance contribution you pay today are actually funding those people who are retired and drawing on their state pension.

And this is where the heart of the pension crisis lies. Too many people dont really think about pensions and retirement and put it to the back of their mind thinking they will be able to rely on a state pension when they come to retire. Afterall, they have paid NI contributions all their life right?!?

Sadly, as more generations pass through retirement ... a very unblalanced mathmateical equasion takes place.

As we develop tecnology and health benefits, our life expectancy is improving with each generation. And living longer simply means having a longer retirement.

Now this may not sound like a problem until you factor in the following; the UK birthrate has been slowly declining over the last few decades.

So as we see our retired population grow in the number of people retiring, and they are increasingly living longer, we have a working population paying NI contributions that is shrinking.

Remember earlier I mentioned that we are not paying into a retirement fund with our own name on it. Our NI contributions are paying for the older generations drawing their state pension now.

So can you now understand how the state pension system which we have in place is not very sustainable.

What can the government do about it?

Well in truth, no goverment in power is going to try and find a long term solution to this future crisis and so they kick it down the road leaving it for the next party to deal with. Why would they want to spend large amounts of money in the kitty now to sort out a problem further down the road. Pensions are not what everyone wants to hear being prioritised over the NHS spending or tax cuts.

However, one important milestone has been achieved by the government back in 2012.

That was the introduction of Auto-enrolment! Which brings me onto our next type of pension - The Workplace pension!

Workplace Pensions

Workplace pensions are most probably the biggest lifeline that will help future generations starting out their working life. But its going to be less helpful for those in their mid twenties and older.

Depending on the type of work you do and who your employer is could make a difference. For example, if you are a civil service employee, or you have worked in a profession, then you may be ok. But for the majority of us who have had your average style job could put more strain on our retirement funds later in life.

There are two main workplace pension schemes.

Defined Benefit Scheme

These are like gold dust and often provide you with some very good benefits that you should almost always stick with. Do not touch these without the advice of a regulated trainec financial advisor.

Defined Contrivution

These are the most common type of workplace pension scheme (certainly since the 1990's) and you are likely to have one or maybe more if you have worked in a job earning £10k a year or more, and you were above the age of 22 when employed. That is garaunteed if you worked after 2012 at least.

These work on a contribution based system in which you and your employer contribute a certain amount of your salary earned to your pension pot. This is taken pre tax and so the government top it up with a nice contribution too.

How much contributed however is where it gets a little bit confusing.

The government introuduced the auto enrolment scheme back in 2012 which required all employers to automatically enrol and make a minimum contribution to the employees pension scheme who are over the age of 22, and who earn at least £10,000.

In 2012, the minimum amount was as follows:

Employer contribution = 1%

Employee contrivution = 1%

Total= 2%

Now to be honest its great it got everyone being automatically enrolled into a pension scheme as more people were now saving. However, 2% is barely anything.

Whats really good and interesting is that introducing the Auto Enrolment in which people have to opt out has seen the majority of people remain opted in on the scheme.

However, a very concerning 20% of working people are believed to have opted out of this avsolutely gold mine of a scheme. If you are one of the 20% opted out indoviduals ... PLEASE PLEASE opt back in when you next go to work.

You are unlikely going to find a better way to get more for your money as you have your employer and the government contributing to your pension.

Auto enrolment 2015 government change

In 2015, the government made a change to this law and incresed the minimum contribution from 2% total to 5% of the salary.

This required a minum of 2% from your employer and 3% from you.

So better news eh? Well not quite.

In 2019, the government made the last change to the scheme and raised the minimum from 5% up to 8% mimimum contrivution. That is a 3% employer contrivution and 5% from yourself.

Well it may sound really good that this has increased, and in some part it is. At least for generations starting their working life after 2019.

For those of us that are slightly older and who maybe started our working life between the 1990's and 2019, if our main source of retirement funds relys on workplace pensions then we going to have a shock.

It is estimated we will require a mininum of 12% of our salary to be invested into our pension in order to live just a moderate and basic lifestyle. That means heating our homes and being able to put food on the table.

However, if we want to be able to afford basics such as being able to eat out a few times and be able to afford birthday presents, the occasional new carpet or furniture, then we will need to save 15-20% of our salary.

Now bare in mind our salary is alot lower at the start of our career than when we come to retire.

But with the help of compounding interest and accumulatuon, this helps to cover this a little bit at least.

So for those of us who are older and began working between 1990's and 2019 ...we are on a very big backfoot here as we were unable to benefit from this auto enrolment scheme and arr unlikely to have had pension schemes as part of our workplace if you held average level jobs.

One of the biggest helpers in pension investing is ..... TIME!

So for those young enough to be starting their working life since 2019, and having not opted out of auto enrolment will see their 8% minimim grow enough over the next 50-70 years for them to gain some nice safety nets.

So ... if you know anyone who is starting out in their working life ... please please tell them to come and have a look at this website.

If they play their cards right ... they could learn to invest their money wisely now so when they reach a young healthy retirement age .. they can be millionairres. The same goes for any children you have or are close to. Did you know you can open a Junior SIPP personal pension for them as soon as they are born. They cannot withdraw the money until they retire so in 70 or so years from now when we have parted the planet ... you could leave them with a very caring and loving memory of a million plus if you start to invest as little as £25 a month for them and encourage them to continue when they grow up.

This is the type of life changing information and guidance I want to encourage as many people as possible to do as this really will prevent future loved ones from falling into a poverty net.

So lets get back to autpenrolment

So currently the government have set a minimum of 8% cobtribution from employers. However, this is still below the 12% basic lifestyle amount many predict we will need.

So this is why its important to find out what your employers pension benefits are when starting new jobs.

Often you will find employers offer more than the minimum and often match any incresed contribution you make to your pension.

For example, my employer autoenrols ita employees on the following:

Employer gives 9%

Employee gives 1.5%

Total: 10.5% (this is above the 8% minimum)

But if I increase my contribution, the following can be gained:

So for a 6% contribution from me, i can earn a very nice 22% into my pension scheme. How amazing is that!

I urge anyone who can take advantage of these schemes to do it now. Even if its half a percent. You can see how easy it is to increase your pension with the help of your employer and the government.