Why you shouldn't ignore the workplace pension

Are we ignoring workplace pensions?

Planning for your retirement is one of those things that can be tempting to ignore - a bit like a damp patch in your home.

The thought about dealing with it, and the cost of sorting it out can be off-putting, but the truth is, the longer you leave it, the worse it's going to get.

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Many people don't love the idea of putting some money aside from their pay cheque, and in the past many people were not offered a pension at work at all.

However, the good news is the law has changed, and the Department of Work and Pensions is running a new campaign to nudge employers and employees to not ignore the workplace pension.

Thanks to the new rules, most workers will be automatically enrolled onto a work pension, whether it's in a massive company with hundreds of people, or if it's just you and your boss. The reality is even though you're paying into your pension pot every month, it's a lot like getting a pay rise because your employer and the Government also puts money into your pot. That's free money you wouldn't have if it wasn't for the pension.

Also, most of us don't want to be forced to work well into old age and would ideally like to relax after a lifetime of hard work. The truth is if you're not working - you're going to have to pay for this in some way. The workplace pension is the perfect way to do this.

You'll be able to access your pension pot at the age of 55, and until then it will be held for you by a pension provider which your employer will choose. You will be given the chance to decide on how risky you want your investments to be, as well as there being options for people to choose Sharia-compliant or ethical funds.

In fact, over 8 million people are already benefiting from a workplace pension and saving for their retirement.

Who can get a workplace pension?

The vast majority of workers are entitled to a workplace pension, and it doesn't matter what kind of work it is, or how big the company is.

You're entitled to a workplace pension if you fulfil the following criteria:

  • You're not already in a workplace pension scheme
  • You are between the 22 and State Pension age
  • You earn more than £10,000 per year (£833 a month, £192 a week), just from one job

According to the Department of Work and Pensions, from the end of September 2017, over 8.7 million people have been automatically enrolled and more than 800,000 employers have met their duties.

If you haven't already been enrolled and you are eligible, you very soon will be – it's not an option for your employer, it's the law.

How much money will I have to contribute?

From 6th April 2018, the minimum contributions for the workplace pension will increase. The minimum you can currently put in is 1% of your wage (it's the same for your employer), meaning you will be saving 2% of whatever your wage is each year before tax earnings.

From the 6th of April 2018 to 5 April, the minimum contribution goes up to 2% for your employer, and you'll have to put in at least 3%. This means you'll be saving 5% of your wage a year for your retirement.

Of course, you can put more money in your pension pot if you wish, and your employer can also increase contributions too.

Try out this calculator to see how much money will be put into your pension each year.

Can I opt out of the workplace pension?

In an ideal world, you'll be paying as much as you can afford into your pension so you have plenty to live off and can retire when you want to.

You can opt out, however that means that you'll be missing out on contributions from your employer and the Government. Don't forget, if you pay income tax, you'll also get money from the government in the form of tax relief.

However, you may decide that you need all of your monthly pay to make ends meet and just can't spare the money for the time being. The good news is you can opt in and out of the workplace pension whenever you like, so can put in (or not put in) what you can afford.

If you do opt out, if you remain at your current place of work for three years, or you move jobs, then you'll be automatically enrolled again. You can of course opt out at that point if you wish.

You'll be given a letter about the scheme when it starts at your workplace which will tell you who your pension provider is. You can then contact that provider to ask for an opt-out form.

This article is provided by the Money Advice Service.

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How we spend our pensions
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How we spend our pensions

Figures from Saga show that the over 50s now account for the majority of money spent by Brits on travel and tourism. They have the time to spare, the money, and they are healthy enough to take on the world.

A poll from Abta found that in the wake of pension freedoms, 35% of people were considering cashing in at least part of their pension to travel. A separate study by Senior Railcard found that pensioners take an average of three holidays a year, plus two weekends away, and 17 day trips.

Research from Senior Railcard found that retirees eat out an average of three times a month. However, one in ten do so more than twice a week, and one in three people said that one of the first things they did when they retired was to go out for lunch with their friends.

Of course, just because retirees want to enjoy themselves, it doesn't mean they are happy to throw money away. The vast majority are keen to eat at lunchtimes, when a fixed lunch menu tends to be cheaper, and canny retirees are skilled at tracking down pensioner special offers too.

Figures from the Office for National Statistics show that on average nearly a fifth of the money spent by people aged 65-74 is on leisure. This includes everything from the cinema and theatre to golfing and gardening. They spent more on this than on food, energy bills and transport.

A report by Canada Life found that retirees are spending £4,279 a year on having fun - that’s more than £1,000 more than they spend on boring essentials, and is a 74% increase over the past ten years. It went on to predict that this trend was set to continue, and that pension freedoms would encourage people to spoil themselves a bit more in retirement

Pensioner property wealth is now over £850 billion, and all these family homes don’t look after themselves. The Senior Railcard survey put home renovations in the top 20 activities people got stuck into on retirement, and figures from ABTA found that almost a third of people who were considering raiding their pension pots under the new pension freedoms planned to spend the cash on their home. This seems like an eminently sensible investment - looking after what is undoubtedly their most valuable asset.

Unsurprisingly, while some pensioners are very well off indeed, others are struggling with debt. Figures from Key Retirement found that the average retiree has £34,000 of debt.

Most of this is mortgage borrowing - in many cases driven up by the number of people who unwittingly signed up to an interest-only mortgage. However, credit cards, overdrafts, and loans are also common. It’s why so many pensioners have used pension freedoms to access enough cash to pay their debts.

The day to day basics are swallowing up their fair share of pensioner cash too. On average, people aged 65-74 spend a third of their weekly income on essentials like food and bills - which is hardly living the high life.
The bank of gran and grandad has become an increasingly vital source of cash for families. According to Key Retirement, of those who release equity from their property, 21% of them use the cash to treat their children and grandchildren. This includes an average of £33,350 to help children get onto the property ladder, £6,000 to buy them a new car, £11,000 on family weddings, and £24,780 giving grandchildren a helping hand.

While retirees are quite rightly spending what they need to enjoy retirement, they are hardly all throwing caution to the wind, buying flash cars and spending the kids' inheritance.

Most expect to have something left over to pass onto their family after their death. Some 69% expect to leave property in their wills, and 75% expect to leave cash - according to Unbiased.co.uk - because while baby boomers know how to have fun - they also know how to save for the future.

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