From knowing how your pension is taxed to understanding when you can start taking money from your pension, there’s lots to think about when it comes to your future savings. That’s without the added complication of unfathomable terminology that many pension providers and advisers throw in along the way.
We surveyed the nation1 to find out how much people really know about pensions. How does your knowledge compare?
What is a pension?
A. Something the government “takes care of”
B. Something my company “takes care of” for my retirement
C. An investment vehicle with special rules and tax benefits
D. A simple savings pot that I cannot get to unless I retire
E. The income I get when I retire
Are you like most people (42%) who think a pension is the income you get in retirement or 3% who don’t have a clue? While the government handles the State Pension, and you may have a workplace pension scheme, the answer is C. As correctly identified by one in five people, a pension is an investment vehicle with special rules and tax benefits.
What does auto-enrolment mean?
A. It is compulsory for employers to automatically enrol eligible workers into a pension scheme in which both parties will make contributions. Employees are not allowed to opt out.
B. It is compulsory for employers to automatically enrol eligible workers into a pension scheme in which both parties will make contributions. Employees can make the decision to opt out if they wish.
Auto-enrolment has been one of the biggest talking points in pensions over the past few years and is a big deal since many companies no longer offer a final salary scheme. It’s great that over half of respondents chose the right answer, B. While you can make the decision to opt out of a workplace pension scheme, it’s not advisable and could cost you thousands of pounds. Click here to find out why.
For most people, when are the savings in your pension taxed?
A. Right at the start when you earn the money being saved
B. You pay income tax twice – when you save and when you take your pension
C. You pay tax on the growth you get
D. Only at the point you take an income from it, and then only if your income exceeds a set amount
Nearly a third of people (31%) had no idea how to answer this question, and 40% got it wrong. So, you’re not alone if you found this question difficult. Over a quarter of respondents correctly answered that you pay tax2 on your pension once you start taking an income – answer D. And then only if your income exceeds a set amount.
When can you start taking money from a private pension?
A. At the state pension age
B. Whenever I like, it’s like an ISA now
C. Any time from 55, as long as I retire
D. Any time from 55, and I can stop or start whenever I like and keep working regardless
72% of people did not know when they could take money from their private pension. Nearly a third thought you can take your private pension at State Pension age, which is currently 65. In fact, it is much sooner than that. As answer D correctly reveals, you can take your private pension anytime from 553, and that does not mean you have to quit your job. For more information on the pension freedoms, click here.
If you were retiring today at the normal State Pension age, how big do you think your pension pot would need to be just to maintain the living wage of £15,269 a year going forwards? (The State Pension will provide up to £8,546.20 of it)
This is a really tough question, although nearly one in five got it right. This answer is B, £200,000. While 77% of respondents did not think their pension was on track to achieve this figure, it’s worth remembering that there are so many things that can affect how much you’re going to need in retirement. In fact, it’s very much unique to you. That’s why it’s always best to speak with a regulated financial advisor to make sure your savings are on track to meet your retirement goals. You can always give us a call to chat things through.
Pension provider illustrations often use terminology including: critical yield, lifetime annuity basis, uncrystallised, defined benefit arrangements, pension commencement lump sum, and AMC rebate. Are you confident that you understand fully what all these mean?
A. Yes, totally confident
B. I’m not sure about some of them
C. I’m not sure about most of them
D. I don’t understand any of them, to be honest
If it feels like pension terminology is from another planet, rest assured you’re not alone. A quarter of respondents did not understand any of the terms shown. 37% knew what only some of them meant. At Portafina we don’t expect you to know what all of these words mean. Instead, we speak to you in a jargon-free way, keeping things as clear and simple as possible. Take a look at our jargon buster where we reveal the meaning of twelve key pension terms in an Earthling friendly way.
“It’s worrying that so many people still don’t understand what a pension is. And as an industry we have got to get better at making everything to do with pensions as clear and as simple as possible. And so does the government, especially when there is still talk of implementing a pension dashboard.
“Saving for your long-term future can only be a good thing and the earlier we get into these habits, the better. But the lack of education from a young age surrounding pensions, and financial education in general, is felt all round. As a parent of young children myself, I am keen to see an improvement in financial education in schools. Although I do appreciate some of the barriers teachers and schools experience with providing lessons on this subject matter. It is something the government needs to address.”
12,003 employed UK respondents carried out between 14/02/19-18/02/19
2Tax treatment depends on your individual circumstances and may be subject to change.
3Taking money early from your pension might not be right for you, as it could leave you with less to live on than you need; it shouldn’t be seen as an easy way to raise money. That’s why it makes sense to get financial advice before making any big decisions.