An Idiot’s Guide to Post April 2015 Pensions

ComplicatedOh, pensions, pensions, why art thou so flippin complex?  Well, good news, all.  From April 2015 they won’t be.

Pensions are changing and here’s eleven simple things you need to know about them.

  1. A pension is a good way to save money for later in your life. FACT.
  2. When you pay money into a pension, your employer also pays some in AND you get tax relief from the Government, which is good.  So the minute you pay £1 into a pension it becomes more than a pound.  This is very good.
  3. If you are employed your employer will have to provide a pension for you to join (some smaller employers don’t have to but most do – the detail isn’t for this blog).  You can therefore join a pension by talking to your HR department or boss.  Easy?  Yes.
  4. If you are employed and you don’t want to join a pension.  You can opt out by telling your HR department or boss.  Easy? Again, yes.
  5. If you’re not employed you can do whatever you want.  Happy days.
  6. The money you pay into a pension is held in an investment until you need or want it.  You can choose what this investment is, or f you prefer, your pension company can choose where your money is put.  When this investment grows it is not taxed, as pensions attract tax relief.  Again, great news and pretty straight forward.
  7. You will need to pay a fee to the pensions company.  This is normal as they are providing a service, like a bank.  You should find out how much this fee is before you start your pension.  If you think it is too much then then you can shop around for a better rate or mention your concerns to your employer if it is a company scheme.  It’s just like buying milk.  You need to know how much it costs and then decide whether to buy it from the first place you find some or shop around.
  8. When you reach age 55 (or age 57 if we fast forward to 2028, which means if you’re around age 43 or below now you’ll probably need to wait until you’re 57) you can start to withdraw money from the pension pot.  Simple? Yes.
  9. When you reach age 55 (or 57, see point 8), you can cash in as much or as little of your pension as you want.  A quarter of what you take out will be tax free – which is fantastic!  You will need to pay tax on the rest at your marginal tax rate at the time you take the money. So just like normal salary.
  10. You could, if you wanted to, swap your entire pension fund for a regular income until your death.  This is basically insurance against you spending all of your pension before you die – most people don’t know when they will die – and is called an annuity.  Heard of those?  They come in lots of different flavours, like ice cream, so if you’re interested in one of those you’d better shop around and learn a bit about them (again, not for this blog).
  11. When you do die – and we all do die – any money left over in your pension passes to your dependent.  Unless, you have bought one of those annuity things, in which case what happens will depend on what flavour ice cream you bought so you’d better understand it when you choose which one you want!

And that’s it really.

So, next time you think about putting some money away for a rainy day.  Think about when that rainy day may be and, if it’s likely to be after you’re 55 years old (or 57 if you’re 43 or younger) why not think about saving into a pension as that way you can take advantage of all that yummy tax relief and help from your employer.  Happy saving.

This blog is for general guidance only and does not constitute independent financial advice!