A Very Quick Guide to Pension Planning
The full state pension is currently £179.60 per week. That’s £9,339.20 per year. Research by Which?* suggests the average person needs at least £13,000 a year to meet their essentials needs — and you’d need twice the state pension to live a comfortable lifestyle.
Whether its maximising your National Insurance contributions or paying into a workplace pension, planning for retirement early gives you the best chance of putting yourself in a strong financial position when you finally finish work.
This guide is intended to provide a starting point for thinking about retirement and give you an idea of the things you should consider when planning for the future.
Please note the information in this blog post does not constitute financial advice. It should not be considered a suggestion to take any specific action and we would recommend seeking independent financial advice before making any long-term or high-value financial decisions.
I’ve already retired and I’m struggling. What can I do?
Firstly, check what you are paid through your State Pension; you might be entitled to Pension Credit. The amount of Pension Credit you are entitled to depends on your circumstances. If your pension is lower than your Pension Credit entitlement, you can apply for Pension Credit to top-up your income.
You should be entitled to:
- £177.10 per week if you’re single
- £270.30 per week (per couple) if you have a partner
- £67.30 per week if you get certain disability benefits, live alone and nobody claims Carers Allowance for looking after you
- £37.70 per week if you care for someone who receives a qualifying disability benefit
- £54.60 per week for every child you are responsible for
- £29.66 per week if the child gets DLA or PIP, plus £92.54 a week if they’re on the highest rates of the care or daily living components
Add all the amounts you are entitled to together and if your income is below this amount, you might be able to claim Pension Credit. The amount you’re actually entitled to will be adjusted based on your capital and savings.
Even if you are only entitled to a small amount of Pension Credit it can be worth making a claim as it is a passport to other benefits, such as cold weather payments and a free TV licence if you’re over 75.
The Pension Credit helpline number is 0800 731 0469.
If you rent you can also claim Housing Benefit. Apply for this through your local council. If you own your own home, you might want to discuss your situation with a financial adviser — we cannot give financial advice at Citizens Advice but downsizing or equity release are options you might want to think about if you’re struggling financially.
Call our debt helpline on 0800 240 4420 if you’re behind with your rent or other bills.
I’m approaching retirement — what should I do?
You might want to start by getting an idea of where you will stand financially once you retire. You can get a state pension forecast by calling the Future Pension Centre helpline: 0800 731 0175. Or check online by following the link below:
Check your State Pension forecast
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Alternatively, call our HMRC team and we can help you set up a Personal Tax Account. Our contact details are at the bottom of this page. A PTA shows your National Insurance record and gives an indication of what State Pension you might receive. We can also help you identify gaps in your National Insurance record and discuss ways to fill those gaps where possible.
For private pensions, you can book a free appointment with Pension Wise by following the link below. Pension Wise provides specialist guidance to anyone over 50 and can help you understand your options with regards to your private and workplace pensions.
Should I pay into my workplace pension scheme?
If you’re on a low income, it can be a tough choice whether to pay into your workplace pension scheme, as it will reduce the amount of income you receive now. With the cost of living rising quickly, we appreciate not everybody is in a position to forgo part of their income at the moment.
That said, if you are in a position where paying into a workplace pension is possible, there’s a couple of things to consider.
Money paid into a workplace pension is not included in the income used to calculate your Universal Credit. At the moment, 55% of your income is deducted from your maximum UC entitlement. So, if you’re normally paid £1,000 per month, £550 would be deducted from your Universal Credit as earned income.
However, if you paid £50 into a workplace pension, your income would be assessed at £950 and only £522.50 would be deducted from your UC. You’d only actually end up £22.50 worse off each month.
Your employer pays an extra amount towards your pension (up to two-thirds of your contribution), and you don’t pay tax on your contribution either. So, even though you lose £50 from your immediate income, you’re better off in the long-run because you get:
- £50 into your pension pot
- £30 top-up from your employer
- £10 in reduced tax**
- £27.50 from Universal Credit
- Total potential income: £117.50
What’s more, once money is paid into your pension pot it will start to grow and you can take advantage of the effects of compounding. Which leads to our next section…
When should I start paying into my workplace or private pension?
If you’ve decided to pay in, you should start as soon as you can.
The biggest factor that will affect how much your savings grow is the length of time your money is invested. The longer you save, the more time your money has to benefit from compound interest.
As an example, if you pay £10 per month into your pension pot for 35 years, with an 8% return you would have £20,678.20 by the time you retire. If you were to pay £100 per month but only save for 10 years, you would have £17,383.87 by the time you retire.
So, saving little and often from an early age can lead to a bigger pension pot when compared to starting later in life with bigger payments.
That said, there can be advantages to delaying paying into your pension. For example, if you want to own your own home, you might choose to pay into a Lifetime ISA instead. The government adds 25% of your payments up to £4,000 per year, meaning you can save up to £5,000 a year towards a deposit on a first house.
In the long-run, owning your own home can reduce your housing costs and means those payments go into an asset you own, rather than paying off a landlord’s mortgage. This can mean you have no housing costs by the time you retire and you will have an asset you can sell to top up your income if you need to.
If you’re on Universal Credit, you could also get a better and guaranteed return on your savings for four years by opening a Help to Save account.
Get help with savings if you're on a low income (Help to Save)
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We aren’t saying any of these options is better than any of the others, and you won’t always have the luxury of choosing whichever option you like. The aim here is just to illustrate the different factors you might think about when planning ahead.
Where you strike the balance and what you choose to prioritise will come down to your personal preferences and savings goals.
Can I discuss my pension with someone at Citizens Advice?
If you have any more questions, or want help with a Personal Tax Account or Help to Save account, contact our HMRC team for an appointment. If you want more information about private or workplace pensions, you will need to speak to a financial adviser or Pension Wise, as Citizens Advice cannot give financial advice.
To speak to Citizens Advice about state pension or other benefits, please email us at email@example.com or follow this link for other ways to get in touch.
Disclaimer: This information was correct at the time of publishing on 18 February 2022 and is provided as a guide only. It is not a recommendation to take a specific action and we suggest you speak to an adviser if you have any doubt about how the law applies to you.
**In the example above, with a £1,000 income, you might not pay any tax. This £10 tax reduction is illustrative only and would only apply where your income is above the person tax allowance threshold.