Knowing how to set up a new pension is tricky as there are so many different options available. Scottish Pension Guide is a free resource that will lead you through the process of picking a pension scheme that is the most suited to you. Whether it is a private or workplace pension, a qualified pension advisor from the Scottish Pension Guide can simplify things down and give you the best financial advice possible. Our goal is to help you make the right decision when choosing a pension, and one that will benefit you the most.
Different Types of Pensions
There are various types of pension schemes available, each with their own set of rules. However, to make things easier, we can divide pensions up into three main types:
Personal Pension Workplace Pension State Pension
It is a legal requirement for all employers to offer a workplace pension scheme. Contributions to your workplace pension are made by three entities: you, your employer and the British Government.
Your employer is legally responsible for enrolling you into a pension scheme and to start making contributions. However, there are a few exceptions:
Your employer does not have to enrol you in the pension scheme if you:
- are not classed as a worker (i.e. if you are taking part in unpaid work experience via higher education)
- are aged 21 or younger, or if you are older than the state pension age
- do not usually work in the UK
- you earn less than £10,000 per year
- you’ve already given your resignation letter to your employer
How much is paid into your Workplace Pension
The sum paid by you and your employer will vary depending on what type of scheme you have been enrolled in.
The amount paid by the government is usually in the form of tax relief. This means that if you pay Income Tax and you pay into a personal or workplace pension, you will receive a contribution to your pension pot.
Typically, within automatic enrolment schemes, the contributions are based on your total annual earnings between £5,876 and £45,000 before tax.
Total Earnings Include:
- Salary or wages
- Statutory sick pay
- Maternity, paternity and adoption pay
Minimum Contribution to Workplace Pension
Minimum paid by your employer: 2% You pay: 3% Total minimum paid: 5%
From April 2019
Minimum paid by your employer: 3% You pay: 5% Total minimum paid: 8%
If you are not already enrolled in a workplace pension but you meet the requirements to be eligible for one, you should speak to your employer. Please be aware, however, that the deadline for automatic pension enrolment is October 2018.
The State Pension is an income paid to those who have reached the state pension age. The state pensions are paid by the UK Government. The idea behind the state pension is that everyone is entitled to a basic wage to support them in their retirement. The funding for the state pension comes from National Insurance payments. This means that your state pension is not based on how much you earned during employment but how much you deposited via National Insurance.
Changes to the State Pension
Since 2010, the State Pension age has undergone a series of radical changes. Between 2010 and 2018 the pension age for women rose to 65 and then to 66, 67 and 68 for men and women. There are plans to continually change the pension ages as time goes on.
The State Pension Pot
In 2014, there was a report made public that suggested the state pension pot would run out earlier than expected. This means that those who were below the age of 40 at the time would likely have a very small state pension and perhaps, for the younger generations, nothing at all. However, it has been argued that if the state pension pot did begin to deplete, then the government would intervene by either raising taxes or reducing the amount of state pension paid out to individuals in their retirement. Either way, it is important for young people to be aware of their options and to start planning for their retirement as early as possible.
Any individual, whether they are self-employed, unemployed or employed, can set up a personal pension plan with a pension provider. Pension providers are typically insurance companies, however, there are several autonomous providers in the UK.
A personal pension is an individual contract between you and the provider. You can decide how much you want to contribute to your personal pension and other people can contribute if they choose to.
Typical examples of people paying into others’ personal pensions are spouses or partners paying into each other’s pensions or parents paying into their children’s pensions that they have set up for them at a young age. Employers can contribute to employee’s personal pensions if they have an agreement to do so.
Restrictions on Personal Pensions
There is no limit to the number of different pension schemes that you are signed up to. You can have a personal pension even if you’re a member of a workplace pension scheme.
There are, however, limits to the total amount contributed to all of your schemes on an annual basis. These limits are applicable if you are eligible to receive tax relief contributions from the UK Government.
Which New Pension Should I Set Up?
If you are not working, then you should look into setting up a personal pension. If you are working but are not eligible for a workplace pension scheme then you should also consider a personal pension to assist with your state pension.
For those who are signed up to a workplace pension, you might want to speak with your employer to determine if you are paying the correct amount and if you want to pay more, or if you want to set up your own personal pension in addition to the state and workplace pensions.
Generally, it is better to know in advance how much you expect to receive in your retirement, so you give yourself time to adjust the amount you pay in or to join additional pension schemes.