Starting a New Pension

If you’re considering starting a new pension, you will need to decide where to save.

The Money Advice Service provides some excellent guidance on this.

Setting up a Personal Pension

If you don’t have access to a workplace pension, for example if you’re self-employed, then you’ll need to set up your own personal pension.

How is a pension different to a savings account?

Imagine your self-employed earnings are £30,000 a year. Let’s take a look at how a savings account could compare to a pension over ten years if you put 5% of earning in each year.

 SavingsPersonal Pension
Your Pension Contribution (5%)£,1,500£1,500
Relief at Source£0.00£375.00*
Total savings after ten years£15,000£18,750
After 30 years of invested in a pension, it could look like this…
Total Contributions over 30 years£45,000£56,250
Total After 30 years with investment growth£48,662.12**
**Based on a savings account growth rate of 0.5% per annum
£109,365.63**
**Based on an investment growth rate of 4% per annum

 *Relief at source means your contributions are taken from your net pay (after your wages are taxed). Then we (or any other pension provider) automatically claim tax relief for you from HM Revenue & Customs (HMRC), adding the basic tax rate of 20% to your pension contributions.

The saving can be even greater if you are a higher rate or additional rate tax payer. If you pay a higher rate of tax, you can claim the extra tax relief back from HMRC in your tax return. As shown in the table below.

You are self-employed, earning £60,000 a year. Let’s take a look at how a savings account could compare to a pension over ten years if you put 5% of earning in each year.

 SavingsPersonal Pension
Your Pension Contribution (5%)£3,000£3,000
Relief at Source£0.00£750.00*
Total savings after ten years£30,000£37,500
Higher rate tax claim at 20%£0.00£750.00
After 30 years of invested in a pension, it could look like this…
Total Contributions over 30 years£90,000£112,500
Total Higher rate tax claimed£0.00£22,500
Real Cost to you£90,000£67,500
Total After 30 years with investment growth£97,324.25**
**Based on a savings account growth rate of 0.5% per annum
£218,731.26**
**Based on an investment growth rate of 4% per annum

 *Relief at source means your contributions are taken from your net pay (after your wages are taxed). Then we (or any other pension provider) automatically claim tax relief for you from HM Revenue & Customs (HMRC), adding the basic tax rate of 20% to your pension contributions.

Paying into a pension early in your working life is the best way to start saving for retirement, as this gives your money lots of time to grow. If you start work at 21 it will be at least 36 years before you can access your pension. However starting early is key to giving you the best chance of having sufficient savings for retirement.

Once you’ve decided to start saving into a pension, you’ll need to choose where to save. The first task will usually be to select the type of pension that’s right for you. The right type of pension will depend on your circumstances and objectives.

Joining a Workplace Pension Scheme

If you have access to a workplace pension scheme, then it’s likely to provide you with the most convenient route into pensions saving. By 2018 all employers must automatically enrol eligible employees into a workplace pension.

Any money you put into the scheme will be topped up twice – first by your employer and second by the government, in the form of tax relief. 

Setting up a personal pension

If you don’t have access to a workplace pension for example if you’re self-employed, then you’ll need to set up your own personal pension. You can also set up a personal pension if you are not employed however your annual contributions will be limited.

What if I’m self-employed?

You’re your own boss and that comes with the responsibility of success and failure in the here and now. It also means saving for your well-earned retirement is your responsibility and your responsibility alone.

Look after your future-self and get started with a pension. We can help you take those first simple steps and help answer some questions:

  • How much should you contribute?
  • How to save tax if you own a limited company
  • How to get a helping hand from the government
  • How to choose your own investments

When setting up your own personal pension, the decision is much broader because there’s a wide range of options on the market to choose from. 

Personal Pensions – where you make regular monthly payments into a plan usually with a wide range of investment strategies chosen to suit different needs and attitudes to risk. Charges vary.

Stakeholder Pensions – which are a form of personal pension with low and flexible minimum contributions, capped charges and a default investment strategy if you don’t want too much choice.

SIPPs (self-invested personal pensions) – which tend to be suitable for larger contributions. They give you a large degree of control over the way your pension savings are invested, but this brings extra risks with it if you’re not an experienced investor and their charges might be higher.