Starting a pension

Secure your financial future with our guidance on building your pension pot

Why should you start a pension?

Though life after your career may seem far away, it’s never too early to start saving for your retirement. However you’re planning on filling your later years you’ll need cash to fund your plans, lifestyle and to cover all your living expenses. 

A pension is a great way to build a sizeable pot, as you can make regular and affordable contributions that add up over time. If you make at least 10 years of qualifying National Insurance contributions, you’ll receive a basic retirement income from your State Pension. This usually isn’t enough to retire comfortably, so it can be a good idea to save into another type of pension. 

Growing your pension pot

You don’t necessarily need to put in a lot of money to see your pension pot grow, as compared to other forms of saving, pensions generally offer a wider range of benefits. For example, if you’re a basic rate taxpayer, the government adds £25 in the form of tax relief for every £100 you add to your pension pot. This means your pension contribution would be £125. The level of government pension contributions you receive depends on your income tax bracket.

If you’re part of a workplace pension scheme, your employer will likely also contribute to your fund, growing your pot at a faster rate than if you were to put that money into a simple savings account.

As all pensions are invested, you have a chance to grow your money in a way that savings in cash can’t give you. They’re also good for inheritance tax purposes, as your pension is passed on without tax deductions if you die before the age of 75.

And finally, when it comes to taking your pension, you’ll have the freedom to take it in several ways, including taking up to 25% of your money as a tax-free lump sum.

As with all investments, the value of your pension pot can go down as well as up. You may get back less than you pay in.

Which pension is right for you?

When you’re ready to start a pension, it’s good to consider all your options. You may be offered a workplace pension by your employer or you might want to take matters into your own hands with a personal pension. You can even save into more than one pension pot if you can afford it.

Below we’ll take a look at the various types of pension, how they work, and how you can get started.

Personal pension

A personal pension (also known as a private pension) is a great way to save alongside your state pension or replace a workplace pension if you choose to opt out or if you’re self-employed.

Unlike a workplace pension which you might get little say in, a personal pension lets you choose a plan that best suits your retirement goals. 

When looking for a provider, it’s important to find out how your money will be invested. A personal pension will offer you a range of funds to invest in, with different levels of risks dependant on your risk appetite. 

For example, choosing a pension fund that’s diversified (invested in a range of assets) generally carries less risk, as your money is spread across a range of assets.

How you pay in

With a personal pension, you can choose between regular contributions or one-off lump-sum payments - whichever is best for your income and retirement goals. You’ll also usually receive tax relief on any money that you pay into your pension, up to a limit of 100% of your salary or £40,000, whichever is lower.

The Wesleyan Personal Pension Plan is a tax-efficient way to save for your retirement. You can choose from a range of investment funds and invest at a risk level you’re comfortable with. Start your pension pot from as little as £150 a month and take a break from paying in at any time.

For guidance on all your pension options, including taking out a personal pension from Wesleyan, you can speak to a Wesleyan Financial Services Consultant.

Workplace pension

If you’re in full or part-time employment, you should be entitled to join your employer’s workplace pension (company pension) scheme. 

When you start a new job, you’ll either be automatically enrolled to the scheme or you can voluntarily ‘opt in’. You and your employer can both contribute to your pot, though how much you pay in depends on the scheme. 

Most workplace pensions are defined contribution schemes. This means that you’ll need to contribute a minimum of 8% of your pensionable earnings monthly – with your employer paying a minimum of 3% of that total. 

If you’ve voluntarily enrolled, your employer must contribute the minimum amount if you earn more than £120 a week, £520 a month, or £480 over four weeks.

With a helping hand from your employer, you can save quicker than if you pay in alone. If you’re self-employed, you won’t have the luxury of employer contributions, so a personal pension could be the right option for you.

An example of how your pension builds 

If you’re earning a salary of £40,000 a year and choose to contribute 5% of your earnings a month while your employer contributes 3%, you’ll build a pension pot of £128,000 over 40 years of pensionable employment. While this sounds like a large amount, it won’t last that long in retirement without other income or savings.

How much should you save in your pension?

The Retirement Living Standards suggests that individuals need a retirement income of £33,00 per year to be ‘comfortable’ (for couples it’s £47,500). While you can use this estimate as a saving goal for your pension, it may not reflect what you actually need in retirement. 

Working out how much you’ll need to save each month depends on a few factors: 

  • Your goals for retirement (holidays, moving abroad, taking up new hobbies)
  • Your living expenses (mortgage, bills, repairs, loan repayments, saving plans, insurance, etc.)
  • If you provide for others (cost of care for your partner and any financially dependent children or grandchildren)
  • What you can afford to save (money you can comfortably part with for a long period of time)
  • How many years you have to save (the age you start your pension up to your ideal retirement date)

If you aren’t sure how much you can comfortably afford, look at your income, expenditure and current budget. If the amount is lower than you’d like, it may be worth looking at areas you can cut back on your spending, like non-essential items and activities. If you have extra time on your hands, looking for a secondary income stream could give your savings a boost.

It goes without saying that the sooner you start contributing to your pension, the more time you’ll have to save. This gives you the opportunity to save a large pot of money over time, growing your pension with smaller, manageable contributions.

It’s important to only ever put in what you can afford, making sure you have spare cash for rainy days and emergencies. 

From choosing a pension provider to working out how much you’ll need to fund your future, there’s a lot to think about when starting a pension. You can speak to a Wesleyan Financial Services Consultant for a review of your finances and no-obligation advice on all your pension options. 

You may be interested in…

Personal pension 

Start your pension pot with as little as £150 a month and discover a tax-efficient way to save for your retirement.

Taking an early retirement 

Want to stop working sooner rather than later? Here’s everything you need to know about taking an early retirement.

Understanding lump sums 

Make the most of your Teachers’ Pension benefits by getting informed on your lump sum entitlement. We’ve answered the most common questions around the scheme.