When you think about pensions, you think about retiring somewhere nice to settle down. For millennial’s on the other hand, retirement age can sometimes seem like a lifetime away. Young adults are settling into new careers and making plans for the near future. The reality is that once we start working, we should start thinking about how we can start securing our futures as early as possible. Here is an overview about what pensions are available and why millenials should consider contributing to one.
What is a pension?
In a nutshell, a pension is the process of saving money towards your retirement. The type of pension that you can get depends on your circumstances, and is considered a long-term investment until you retire.
Why should millenials think about their pensions?
- The future is more unpredictable than ever – The current pandemic has made it clear that the future is unpredictable as new legislation has been introduced to control the spread of Covid-19. None of us know what the future has in store for us, so putting money away for your retirement whilst you can is great way to ensure that you’re prepared for what could happen in later life.
- The average living cost for a pensioner is more than you think – Research shows that the average living costs for a pensioner in the UK is £11, 200 per year. The average pensioner would need approximately £215 a week to cover basic costs such as food, clothes, travel and heating. As a millenial, you have more opportunities and resources than the generations before you. There is a greater chance of you maximising your retirement fund with the various forms of pensions available to you in addition to other savings.
- A pension combined with a Lifetime ISA can help you achieve a comfortable retirement – A Lifetime ISA allows you to save for your first home or later life if you’re over 18 but under 40. You can deposit up to £4000 each year until you are 50 years old, and the government will add a 25% bonus to your savings (up to £1000 per year). A Lifetime ISA coupled with a pension that you start paying into before you’re 30 years old can increase your retirement fund and your quality of life when you finally settle down.
The main types of pensions available are:
- Workplace Pension
- Individual Pension
- State Pension
A workplace pension is a scheme that is set up by your employer. A percentage of your wages is paid into the pension scheme, and your employer makes contributions to the scheme too. Your employer must enrol you into a pension scheme if:
- You’re between the age of 22 and State Pension age
- You work in the UK
- You’re earning over £10,000 a year
There are two types of workplace pensions:
- Defined contribution – this type of pension is based on how much money has been paid in.
- Defined benefit – this type of pension is based on your salary when you retire, and how long you have worked for that employer.
There are various types of individual pensions including personal pensions, stakeholder pensions and self-invested personal pensions. These types of pensions allow you to pay in when you want to, and what you get back largely depends on how well your investments are doing.
A State Pension is provided by the government and is calculated based on your National Insurance record. The more qualifying years you have on your National Insurance record, the more State Pension you will receive. You need at least 10 qualifying years to be eligible for State Pension.
The State Pension age in the UK is currently 65, however this is eligible to change. The Gov.uk website provides a free pension age calculator which lets you know the exact age that you will qualify or your pension based on your birth date.
Having a pension is entirely your choice. Many millenials aren’t thinking that far ahead, but for those who are, take advantage of what is available. The schemes in place can help you settle down the way you want to when that time comes.
T K Williams-Nelson