In this guide, the team behind Jarvis – the app which makes managing your pension easy – answer some of the most commonly asked pension questions posed by contractors.
- How much do you need to retire in practice?
- How do pension contributions work?
- What does pension consolidation mean?
- How can you withdraw funds from your pension?
- How do pension management charges work?
How much do you need to retire in practice?
How much should I save?
Deciding how much you need to save for retirement is based on two main variables:
- How much you can afford
- How much you want to live on in retirement
The first part is perhaps easiest to determine. Figure out how much you can afford to contribute consistently, set up a direct debit and remember to increase as your income grows.
Understanding how much you need to live on in retirement requires you to do a little forecasting based on your current income and expenditure and how you expect this to change in retirement.
Perhaps you will no longer have a mortgage or have to pay childcare or school fees. Maybe you plan to downsize so your household bills overall are lower.
Use this to make informed decisions about what your costs might be in retirement, how much income you’ll need each year to achieve that and therefore how much you’ll need to save to get there.
How do pension contributions work?
How does pension saving differ for employed vs self-employed people?
If you’ve been employed by someone else at any point, provided you meet certain criteria, by law they are required to enrol you into a workplace pension scheme.
This is known as pensions auto-enrolment which stipulates that a percentage of your salary every month is automatically put into a pension scheme, at least 5%, which is then topped up by your employer by at least 3% for a minimum monthly contribution of 8% though you and your employer may of course contribute more if you wish.
In contrast, if you are self-employed, the onus of responsibility is on you as an individual to make plans for your own retirement savings. And with increasing unlikelihood that the state pension alone will be sufficient to sustain us in later life, it is crucial that if you work for yourself you start making arrangements to save for your retirement now, however small your contributions.
With an annual allowance of £80,000 and no limit on your pensions lifetime allowance, pensions remain one of the most tax efficient ways to save for your retirement.
When you contribute to a personal pension, you automatically get tax relief of 20%. This means that a £100 pension contribution actually costs you £80.
If you’re a higher rate taxpayer, you can claim an additional 20% tax relief via your self-assessment tax return.
Jarvis offers a convenient and affordable way to kickstart or optimise your pension planning through a simple, easily accessible solution.
What does pension consolidation mean?
Few of us stay in one job for our entire careers these days. In contrast to previous generations for whom a job for life meant just that, now, in an era of portfolio careers, side hustles and growing self-employment, lots of us have multiple and if we’re lucky, a pension plan to match.
This shift in working patterns in recent decades has spawned an entirely new demand for additional pension services. Consolidation is one such trend.
Pensions consolidation refers to the amalgamation of multiple pension pots into a single plan.
There are a few reasons why you might do this:
- To minimise the administrative burden of having to keep track of different providers and plans and have more control over your pension planning
- To reduce the chances of your pension being forgotten about at the point of retirement
- To potentially reduce fees and charges by consolidating your pension into one product
Reasons not to consolidate
But consolidating is not the best option in all cases. As is often the case in matters related to your personal finances, the right answer depends on your individual circumstances.
For example, let’s say you have certain benefits or bonuses attached to one of your older pensions, which you would forfeit by transferring.
Your existing pension may have lower fees and charges than the new plan would or better options for your money.
To find out which option would work best for you, consult a financial adviser who can help.
To get started, gather all of your account information for your existing pension plans from current and previous employment. If you’re struggling. write a list of all your previous employers and get in touch with their HR departments to see if they can shed any light. You can use the Government’s free pension tracing service to help with this process.
Getting on top of your later life planning is just one more thing on the to do list, but sorting it out early could pay dividends over the long term.
How do you withdraw money from your pension?
For most people, the earliest they can withdraw money from their pensions is 55, in the case of a defined contribution (DC) arrangement, though this increases to 57 from 2028 for anyone born on or after 6 April 1973. For those people invested in a defined benefit pension scheme, under current rules, the earliest they can withdraw their pension is 60 or 65.
Regardless of the size of your pension pot, everyone over the age of 55 is entitled to withdraw up to 25% in a lump sum or in smaller amounts totalling 25% overall, completely free from income tax.
There are three main options for the remainder:
- Swap it for regular income by buying an annuity
- Draw it down in a series of smaller lump sums
- Pay yourself an income as you need and manage the process yourself
You could also leave your pension fully invested until you reach your final retirement age. Remember, the longer your money remains invested, the greater the potential to accrue even more returns over the long term, ultimately boosting your pension pot further.
Remember that depending on your individual circumstances, how you draw down your pension will have tax implications, particularly when your pension assets are considered alongside other income like your state pension. Choosing to take lump sum payments for example could push you into a higher income tax bracket unexpectedly, so do seek financial advice before making a decision.
Pension assets are a particularly lucrative area and so unfortunately attract unscrupulous scammers. Be vigilant and always make sure you’re speaking to a qualified and regulated adviser (you can check the FCA register for peace of mind) who is able to give you sound and accurate pensions advice, guidance and support.
How do pension management charges work?
Pension management fees and charges
Like most financial products, pensions have a series of fees and charges associated with them. Here are some of the most common ones.
- Annual management charge
This charge is designed to cover the cost of running and administering your pension scheme and are more commonly associated with workplace pension schemes however they may also apply to pensions you set up yourself too.
- Ongoing Charges Fund (formerly known as Total Expense Ratio)
This charge represents the running costs of the pension fund.
The ongoing charges figure (OCF) covers the day-to-day costs of running an investment fund. It’s usually charged as a percentage of the value of your investments. Look for it in the Key Investment Information Document (KIID) associated with your funds.
- Trading/dealing cost
This is the cost associated with buying or selling investments into your pension plan, which is more common in self investment pension plans than workplace plans.
- Pension transfer charge
If you are consolidating pensions there may be a charge linked to this transfer which may include, for example, a termination penalty or exit fee.
There are a number of other fees and charges you may incur depending on the type of investment you choose.
Understanding the total cost associated with your pension plan is a vital part of the process, as fees continue to be incurred irrespective of whether the value of your fund goes up or down.
While price should not be the only factor in your decision making, your priority must be getting the most for your money and minimising the amount that’s been gobbled up in admin fees.
Download the Jarvis app
Download the Jarvis app for tools and resources that could help you take control of your pension planning.
Complexity is out. Simplicity is in.
Start managing your pension the easy way with Jarvis.
+ Consolidate old pensions
+ Find out the exact age you can retire