Pensions and retirement

Many people try to start building their pension from a relatively young age because we tend to live longer than previous generations.

The State Pension is designed to cover the most basic of needs and many older people who have no independent savings live in poverty.

Throughout your working life, your National Insurance contributions will build up your entitlement to the State Pension.

National Insurance contributions are also credited to your National Insurance record when you’re unable to work and are, for example, claiming Employment Support Allowance, Jobseeker's Allowance or Carer's Allowance.

This pension is separate to any workplace or personal pension that you may save for.

As with other welfare benefits, the State Pension rules are also subject to change and you may not be able to rely on this to cover all of your needs when you retire.

The State Pension is a regular payment from the Government that most people can claim when they reach State Pension age.

The age at which people qualify for a State Pension is changing and you’ll be affected if you’re a man born on or after 6 April 1951, or a woman born on or after 6 April 1953.

If you reached State Pension age before 6 April 2016, you’ll need 30 years of National Insurance contributions to qualify for the full State Pension; otherwise you’ll receive less than the full pension.

If you reach State Pension Age after 6 April 2016, then you’ll need 35 qualifying years of contributions in order to receive the full State Pension.

You can calculate your State Pension age on the gov.uk website.

With a few exceptions, from April 2016 you will no longer be able to claim a pension based on the contributions of your husband, wife or civil partner.

'Contracting out' to pay a lower rate of NI contributions because you’re paying into another type of pension, such as a final salary scheme, will no longer be an option and this will come to an end.

You can continue to work while claiming your State Pension, but this may affect your entitlement to other benefits.

If you haven't got a workplace pension then a personal pension might be a good way of saving for your retirement.

Here's how it works:

1. you make regular payments,
2. you may receive tax relief on payments,
3. your employer might also make payments,
4. the fund is invested, e.g. in stocks and shares.

Stakeholder pensions offer greater flexibility as you make payments whenever you want. They must meet the following conditions:

• Pension provider can't charge more than 1.5% of the fund's value for the first 10 years, and 1% thereafter, for administering the pension.
• Minimum contribution set at £20 per month, although you can pay in more.
• No penalties for missing or stopping payments.
• You can switch your fund to another stakeholder scheme or other pension at any time without penalty.

SIPPs are for experienced investors or those with lots of money to invest, as they tend to have higher administration charges. They give you the freedom to choose and manage your own investments. SIPP providers include insurance companies, pensions consultants and fund managers.

The Association of Member-Directed Pension Schemes (AMPS) is the trade body for SIPPs providers and managers. You can find a list of approved SIPP managers by visiting their website.

You save up for your retirement through contributions deducted directly from your salary. Your employer may also contribute to your pension if they offer automatic enrolment into the scheme.

There are two types of workplace pension schemes:

1. occupational pensions, and
2. group personal pensions or stakeholder pensions.

These are divided into two types:

1. Final salary schemes

You pay a set percentage of your wages towards your pension fund and your employer pays the rest. Your pension is based on your pay at retirement and the number of years you have been in the scheme. It’s not dependent on the performance of the stock market or other investments.

Final salary schemes are becoming less common and most employers no longer offer them.

2. Money purchase schemes

The money you pay into the scheme is invested and your pension will be based on the amount of money paid in and on how the investments have performed.

Your employer may also pay a regular amount in - but this isn't always the case. If your employer offers automatic enrolment into a workplace pension they will be obliged to make contributions.

Other benefits of occupational pension schemes

• life insurance which pays a lump sum or pension to your dependants if you die while still employed,
• a pension if you have to retire early because of ill-health,
• pensions for your wife, husband, civil partner and other dependants when you die.

Workplace group personal and stakeholder pensions

Your employer chooses the pension provider but you’ll have an individual contract with them. This may be an option if you’re not eligible to automatically enrol into your workplace pension.

You pay contributions into your pension fund direct from your wages, and the money is invested.

With a workplace scheme, the investment choices may be made for you by the provider.

Employers must enrol their staff into their workplace pension if they’re eligible employees.

You will be eligible for workplace pension enrolment if you are:

• not already in a workplace pension
• aged 22 or over
• under State Pension age
• earning more than £10,000 a year
• working in the UK.

You can choose to opt out. However, if you can afford to join the scheme, it’s a good idea to do so as your employer also has to make a contribution.

Also, you will get tax relief on the contributions you make into the scheme.

THT Direct provides information about pensions.

You can get more advice on pensions from the following:

• Moneyhelper - impartial guidance on all aspects of pensions, backed by the Government.
• Workplace pensions resource on gov.uk