Pension Series – What Is a Pension?

Welcome to Finance Pondering’s Pension Series!

Over the next two months we’ll be writing about all things pensions and pensions related. Starting from the very basics of what a pension is and why you should have one through to different types of pensions and pension performance.

The world of pensions is a ridiculously complicated one and honestly it’s no wonder that most people either don’t know or simply cannot be bothered to understand or get involved with their pension. Well, we’re going to change that for those of you reading this. Our aim is to demystify pensions so that you can make better decisions and have a brighter financial future.

So with that being said here’s our first instalment in the Finance Pondering Pension Series!

What Is A Pension?

You’ve just started your new job (congratulations and hopefully you seriously negotiated on your salary) and already the HR team are asking you about your pension options as part of joining the company. You say “Yeah, sure, sign me up”, and whilst this is the correct thing to say do you necessarily know what you’ve said yes to? You’ve said yes to arguably the best form of saving a person can have, you’ve said yes to saving into a pension.

In the most absolutely simple terms possible a pension is a specific type of saving plan/product that supports you in saving money for later on in your life. Plus a pension receives incredibly favourable tax treatment as a form of saving. Ultimately a pension is like a savings account that you can access once you’ve retired.

Ok, So How Do I Get Into A Pension Scheme Then?

Whilst you can ask to contribute a pension scheme at any age in any form of employment, we for the purposes of this series are going to assume you are eligible for the purposes of something called “Auto-Enrolment”.

As the name suggest, “Auto-Enrolment” simply means that when you join a company and subject to being eligible, you will automatically be enrolled into that companies’ pension scheme.

You will be eligible for “Auto-Enrolment” if:

  • At least 22 years old

  • You haven’t yet reached State Pension Age (more on this in our next article)

  • Earning a salary of at least £10,000 per annum

  • Working in the UK with a contract of employment.

Assuming you meet all of the above requirements then congratulations as the day you join your company, your first day on the job when your laptop doesn’t work and you forget everyone’s name, well at least you’ll be in your companies’ pension scheme as you’ll be “Auto-Enrolled”.

Should I Say Yes When My Employer Offers Me A Pension?

Without a shadow of a doubt, yes. Absolutely. Seriously, do not dither about this, say yes! The most common type of pension is known as a “Employer’s Pension” or more commonly a “Workplace Pension”. Here in the UK you may have seen the adverts on your tv actively promoting “Workplace Pensions”.  The reason we’re telling you that you should absolutely say yes is simple. When you pay into “Workplace Pension” so does your employer.

The current contributing rates for the year 2019-20 are set at the rate of Employee 5% and Employer 3%. So you as the employee would be contributing 5% of you gross annual salary and then your employer will automatically pay 3% of your gross annual salary. Yes, your employer will pay into your pension as well!

Let’s say you earn £10,000 a year in this case. You would be paying £500 a year in and your employer would be adding an additional £300. Winning.

That then is essentially what a pension is as well as how you can go about making sure that you get involved with your “Employer’s”/ “Workplace” pension.

In our next post we’ll be talking about the different types of pension that available, in which sectors they’re in and how you can make the best choice with regards to them.

Other series include My Personal Stock Portfolio Series and The FinTeh/App Review Series

Leave a Reply