Saving for retirement

Why save for retirement?

At retirement, you’ll probably need to use your pension savings to provide you with regular income when you stop working. But for many, saving for retirement can be lower on their list of priorities than everyday expenses. If you don’t have something in place, you might not be able to achieve the standard of living you hope for when you retire. This means you’ll either have to:

• Retire later
• Start saving more towards your retirement
• Lower your expectations of what you’ll be able to afford in retirement

For these reasons, it’s a great idea to begin saving for retirement now, and a pension is one of the obvious choices. The State Pension alone might not provide you with enough income – that’s where our products can help.

How do pensions work?

A pension is a financial product that you pay money into while you’re working. You can choose to retire and start taking an income from your pension savings from age 55. You could receive a higher monthly income when you retire if you set up and pay money into your pension early on in your working life. This is because the investments in your pension are designed to grow in value over the long term, although this isn’t guaranteed.

Your pension contributions are eligible for tax relief. This means each contribution will be topped up by the government.

Types of pension scheme

There are various types of pension arrangements, including defined benefit and defined contribution schemes.

Defined benefit

Defined benefit pensions (sometimes known as final salary schemes) pay out a secure income for life which increases each year. You might have one if you’ve worked for a large employer or in the public sector.

Your employer contributes to the scheme and is responsible for making sure that there’s enough money in the pension pot to pay your retirement income. You can also contribute to the scheme at any time. Your employer will usually continue to pay a pension to your spouse, civil partner or dependants when you die.

The income you receive is not reliant on investment returns and is calculated using three elements:

1. Your years in the scheme

2. Divided by the accrual rate of the scheme

The proportion of your earnings you’ll get as a pension for each year in the scheme (commonly 1/60th or 1/80th)

3. Multiplied by your pensionable earnings

This could be your salary at retirement (final salary), salary averaged over a career (career average) or another formula

For example, if you were in a defined benefit scheme for 10 years with a salary of £30,000 and the scheme accrual rate was 1/60th for each year of service this would give you a pension of:

10 (years) ÷ 60 (accrual rate) × £30,000 (salary) = £5,000 income

Defined contribution

With a defined contribution pension, you build up a pot of money that can provide you with an income during retirement. Unlike defined benefit schemes, which promise a specific income, the income you might get from a defined contribution scheme depends on a number of factors: the amount you pay in, how well your investments have performed and the choices you make when you access your money.

Your pension contributions in the scheme can come from you, a third-party and/or your employers, as well as tax relief from the government.

In order to build up a defined contribution pension pot, you can invest your money in a range of different investment funds. The value of your pension can grow, but it can also go down in value, as with any investment.

Funds can invest in different assets such as shares (otherwise known as equities), bonds, property, cash or other financial investment types. It is the value of your fund(s) and the assets within them which determines the value of your pension.

Depending on how far away your retirement is, you could take more investment risk with your pension. As it’s a long-term investment, your savings could recover from any short-term losses you might incur. You should speak with a financial adviser before you decide on where to invest.

Next steps

Approved on 15/03/2024