Your retirement income is likely to come from multiple sources.
If you have held different jobs during your career you might have several workplace pensions, including a combination of Final Salary and Defined Contribution (DC) schemes. You might also have private pensions.
Then there’s the State Pension, linked to your National Insurance Contributions (NICs).
When can each be taken, how much might you receive, and how can you ensure they work well for you within your overall retirement plan?
Here’s your complete pension guide.
The State Pension
- How do I qualify?
The State Pension amount you receive is linked to your NICs. To receive the full State Pension, you’ll need 35 ‘qualifying years’ on your National Insurance record.
For a year to count as ‘qualifying,’ you’ll generally need to earn £120 a week as an employee (£6,240 a year), or £125 a week if you’re self-employed (£6,475 per year).
You’ll also need at least ten qualifying years before you become eligible for any State Pension at all.
You can check your National Insurance record to look for gaps.
- How much will I get, and when?
If your contributions are up to date, the full State Pension payable for the 2020/21 tax year is £175.20 per week, (£9,110.40 per year).
The State Pension age is currently 66, but this is due to rise to 67 by 2028 and 68 by 2046.
The value of the State Pension currently rises in line with the triple lock, guaranteeing an annual increase of the highest of 2.5%, average earnings growth or annual price inflation, as measured by the Consumer Prices Index (CPI).
- How does the State Pension fit into my retirement plans?
You’ll need to look at the State Pension in the context of your wider retirement income.
Dependent on the other pensions you hold, the State Pension could help you top up your income from a Defined Benefit (DB) scheme or help you limit flexible withdrawals from a DC plan.
The full State Pension might not be a large part of your retirement income, but it is both a safety net and a foundation on which to build the rest of your retirement planning.
Your workplace pension
- What is auto-enrolment?
First introduced in 2012, auto-enrolment was the government’s attempt to get more people saving into a pension. The Pensions Regulator confirms that ten million workers had joined an auto-enrolment scheme up to the end of last year.
The minimum contribution for the 2020/21 tax year is 8%. Of this amount, your employer contributes 3% and you contribute 5%. You can increase your contribution if you wish, and your employer might increase their contribution too.
Investing only the minimum amount isn’t guaranteed to provide you with the lifestyle you want in retirement. Consider supplementing your auto-enrolment from elsewhere and be sure to speak to us.
- DC schemes and pension flexibility
With a Money Purchase (or DC) scheme, you accumulate a value through the contributions you make. You then purchase a retirement income using your saved pot.
You might opt for the stable, regular income of an annuity or use Pension Freedoms to take a more flexible option such as Drawdown.
As with your other pensions, avoid looking at each scheme in isolation but see it as part of an overall plan instead.
You might use the stability of an annuity to cover regular fixed costs, leaving you free to create flexibility from other income. If your fixed expenses are already covered, a flexible DC option could be ideal for discretionary outgoings such as holidays.
Annuity vs. Pension Freedoms: How will you take yours? Will help you further explore your DC choices.
- What about Final Salary schemes?
Whereas DC schemes use your contributions to build a pension pot, with a Final Salary pension (or DB scheme) your future income is defined from the outset. It is calculated using your years of service and either your final or average salary.
A Final Salary pension will pay out a regular income for the rest of your life, providing you with security in retirement. Knowing how much you will receive allows you to budget and be more flexible with the other income you receive.
Private pensions and other investments
Your retirement income might also be coming from private pensions, regular investment income, or other sources, such as rent from Buy to Let properties, for example.
Your non-pension income might be more flexible, but deciding how it fits into your overall retirement plan isn’t easy. Speak to us and we can help.
Get in touch
Our job as financial planners is to take your financial position as a whole – your pension provision as well as any income you might be anticipating from elsewhere – to build a retirement plan individual to you.
If you would like to discuss your retirement plans, please get in touch. Email at firstname.lastname@example.org or call 0800 0787 182.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation which are subject to change in the future.