Research has found that the state pension alone will not be enough to cover even the modest of lifestyles in your golden years so Brits may need to look at other pension schemes if they want to give up work entirely
Pensions are important and if you want to retire one day, you’ll likely have to rely on one to fund your golden years.
However, research has found that the state pension alone will not be enough to cover even a modest lifestyle in later life According to the latest data from the Pensions and Lifetime Savings Association Retirement Living Standards, a single person would need £14,440 a year to cover “all your needs, with some leftover for fun”. This goes up to £31,300 for a moderate standard of living and £43,100 for a comfortable one.
Phil Jelly, a pensions partner at Gateley Legal, says these figures demonstrate that a person relying on the state pension alone – which for 2024/25 is worth £11,500 per year – might struggle to cover all their expenditure needs during retirement. He added: “This is why having other forms of pension savings and income are vital, particularly if you plan on stopping work altogether when you reach the state pension age.”
Mr Jelly explained that there are three different types of pensions in the UK and these are: the state pension, workplace pensions, and personal/private pensions. And currently, there is no limit to how many pensions you can have. To help those who may be confused about their pension pots, Mr Jelly has explained all the basics you need to know.
What is the state pension?
The most well known pension is the state pension, which is a payment made by the Department for Work and Pensions (DWP). The state pension is paid for through National Insurance contributions, which come from the wages of people working today. As it stands, each working generation pays for the older generation above them so those who are working and paying taxes now, fund the current state pension payments.
Currently, you can start claiming the state pension once you turn 66 years old – although this is rising to 68. To be eligible to claim, most people need to have at least 35 years of National Insurance contributions, some will need more, and ten years to get anything at all.
How much state pension you get also depends on when you were born. If you’re a man born on or after April 6, 1951, or a woman born on or after April 6, 1953, you’ll claim the new state pension. The full new state pension is currently worth £221.20 a week and is worth £11,541.90 a year. The basic state pension pays £169.50 a week and is worth £8,844.27 a year.
What is a workplace pension?
Mr Jelly explained that a workplace pension is set up by an employer for eligible employees – in most cases on a group basis, rather than individual. In 2012, the Government began to phase in “auto-enrolment” for workplace pensions. This means all workers need to be automatically put into their workplace’s pension plan. Since 2017, all employers have been required to automatically enrol workers into their workplace pension scheme – no matter how large the business.
To be eligible you need to be over the age of 22 and under the state pension age, earning over £10,000 a year, and working in the UK. Mr Jelly said there are typically two different types of workplace pension. He said: “Defined Benefit, which can be also called final salary or career average, bases your yearly pension payments on either your final or average salary or how long you’ve worked for your employer. This amount will then be paid to you each year of your retirement.”
There is also Defined Contribution is where a person’s pension pot is made up of their own and their employer’s contributions based on a percentage of their salary. Mr Jelly says these are then invested by your employer’s chosen pension provider in the stock market and other assets and your final pension pot is then a mixture of your contributions, your employers, and any gains the investments made. Mr Jelly added: “Most workplace pensions in the UK are defined contributions arranged by your employer.”
Your employer should tell you what type of pension scheme yours is, alongside who is running it, and how much you will be contributing each month. Usually, your employers decide the levels of contributions to the scheme but all must contribute a minimum of 3% of your qualifying salary. Overall the total contribution has to sit at 8%. According to the Government’s Money Helper page, if your employer puts in 3%, you will put in 5%. However, all schemes are different so to find out exactly what your scheme entails you should ask your employer. You also get tax relief for workplace pension contributions which are put into your pension pot.
Most pension schemes set an age when you can take your pension, usually between 60 and 65. In some circumstances, you can take your pension early with the earliest usually being 55. Some also companies offer to help you get money out of your pension before you’re 55 – again this depends on your employer.
What are personal/private pensions?
This is where people usually get confused as the term private pension can be used to describe both the workplace and a personal one. Mr Jelly explained: “Usually, personal or private pensions are set up by yourself rather than by an employer, for example, if an individual does not have access to an employer’s pension arrangement, or if they are self-employed or want a top-up pension arrangement.”
Mr Jelly said a defined contribution pension is one of the most common types of personal pension plans around. The difference is that you find the provider and you make the contributions, with your pension provider again making investments for you. This type of pension gives you more flexibility in how much you contribute, you can either do it monthly or in larger lump sums and your pension provider claims tax relief on your behalf and puts it into the pension pot.
However, there are other types of personal pensions to have such as stakeholder pensions and Self-invested Personal Pensions (SIPPS). Before opening up a personal pension you should research or discuss with an expert which one would suit you best. Again, you can access your personal pension at 55 years, at the earliest and you don’t need to be retired from work to get it.
