4 Taking stock of your pension plans
Now it’s time to see what you’ll get from your own pension pots.
Occupational pensions, workplace pensions or personal pensions are collectively known as ‘private pensions’ to distinguish them from the state pension.
Over your working years you may have saved into many different pension plans. There are different types of pension products and it’s important to understand what you have, as this will affect how it can be accessed and ensure you don’t lose any valuable benefits. This video explains the different types of pensions.
Transcript: Video 2
Occupational and personal pensions are collectively known as private pensions to distinguish them from the state pension. Occupational, or work-based pensions, are organized by your employer. Usually both you and the employer make contributions, and most employees are now automatically enrolled onto a pension scheme unless they choose to opt out. Personal pensions are something you organize yourself, regardless of your employer, or indeed whether you're even working at the time.
Whichever kind of pension you have-- and many people have both-- you'll probably most interested in how much pension you'll get when the time comes. And that depends on whether it's a defined contribution scheme, or a defined benefit scheme. Some companies and public sector bodies, like local governments, provide defined benefit schemes. The amount you get is based on a combination of how long you work for that employer and how much you earned. For that reason, they're sometimes called final salary, or average salary schemes.
The longer you work there, and the more you earned when you left, the more pension you'll get. And there are usually some really clear and simple rules for working it out. Some organizations, for example, say that if you're working and in their pension scheme for 40 years, you get a guaranteed 2/3, or 40/60, of your final or average salary paid for the rest of your life. And if you work for them for less than 40 years, you simply get a smaller proportion of it.
You're lucky if you have a pension like this because they're not widely available now. And these days the terms aren't as good as they were, mainly because people are living longer. So guaranteed pensions like this are expensive for employers.
Also with this type, it's the employer that takes all the risk. If the stock markets fall, your pension stays exactly the same. So if you have a defined benefit pension, then take serious financial advice before transferring it. You're almost invariably better off leaving it where it is unless you have a serious illness.
A defined contribution scheme, also known as a money purchase scheme, is what most people have these days, whether it's a workplace pension or your own personal pension. You usually pay in an agreed amount each month, and if it's a work-based pension then your employer will, too. All the money goes into your own pension pot.
But with this kind of pension, there's no guaranteed pay-out so you won't know in advance exactly how much you'll get. Your pension pot will grow according to the rise and fall of the investments in it, such as stocks and shares. But your pension provider will send you regular updates and forecasts based on the best information available at the time.
Then, when you retire, you decide how and when to invest or draw on your pension pot money to give you an income. You can have a guaranteed income by buying an annuity, take the pension pot as a lump sum, or simply take amounts as you need it. You're also allowed to take a tax-free lump sum of up to 25% of your pot-- handy if you want to go traveling or do home improvements.
Tracking all your pensions
The next step in your retirement planning is to get the details of all the pensions you hold, including those you may have joined earlier in your working life.
Tracking down details of all your pension pots can involve a lot of paperwork but potentially is very worthwhile. It is estimated that close to £19 billion sits in unclaimed pensions in the UK, often purely as a result of the current addresses of scheme members being lost (ABI, 2022). So remember to provide your new address to your pension provider(s) after a home move. Whilst the treatment of unclaimed pensions varies between different providers ultimately unclaimed pension savings could in the future be moved into the government’s ‘dormant assets scheme’ and, if left unclaimed, used to help support good causes. Tracking down your pension savings therefore avoids them being used for someone else’s benefit rather than your own.
You can check if you’re a member of a pension plan even if you don’t have the details, by visiting this site: Find your pension contact details [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] . Open the link in a new tab or window so that you can easily return to the course.
Working out what your pension plans are worth
Pension providers should give details of the contributions you have made, and projections for the pension income the plans are aiming to provide.
Many pension providers also have websites to enable members to check their pension details and contributions. Find the details of your projected pension income – this is the amount of money the plan is forecast to provide you, based on certain assumptions.
Defined benefit or ‘final salary’ pensions can give you a more definite projected income, but defined contribution/money purchase pensions will give an estimate. Watch the video again if you need a reminder on this. If you have defined contribution pensions you can estimate the pension income you could get using this calculator: My pension income. Open the link in a new tab or window so that you can easily return to the course.
Also, it’s a good idea to check the age the plan has as your retirement date. You may have provided this age when you started saving, but you might have changed your plans since. This is important as pension providers can change the composition of your pension savings the closer you get to retirement. Usually it makes sense to move the savings into low- risk investments so that there is greater certainty about the value of your pension pot and less risk that the pot falls in value just prior to retirement.
Pension savings are a tax efficient way of saving for retirement as you receive tax relief on your pension contributions. However, there is an annual limit on how much you can save each year beyond which you do not get any income tax relief on your contributions. This limit is quite high, so it will not impact most people. Your pension statements should tell you how much of this annual pension savings limit you have used.
There’s also a limit to the tax-free amount you can withdraw from your pension savings. This is called the Lump Sum Allowance, which is 25% of the total pension pot, up to a maximum of £268,275.
So, to recap:
- Get the details on all the pension plans you have put money into over the course of your working life.
- Understand the terms and benefits of your pension plans.
- Check the retirement age on your plans.
- Find out what annual income these savings are forecast to provide (and when).
Adding your pension forecasts to your state pension will enable you to work out whether you’ll have enough income to fund the lifestyle you want in retirement.
Next you will explore the options available for turning your pension savings into an income when you retire.