What is a Pension?
A pension is money you'll use to live on when you retire. There are two main types of pensions which we’ll discuss here, and these are: State Pension and Private Pensions in the Workplace. We will also discuss some steps to locate a lost pension. The most common type is the state pension from the government which covers your basic needs. However, you may find that it is more useful for yourself to save some extra money in a pension fund, to give you a better standard of living once you retire. These are predominantly associated with private pensions in the workplace.
State Pension
The State Pension is a regular payment from the government most people can claim when they reach State Pension age. Your State Pension age depends on when you were born. You can find out your State Pension age by using the calculator on the GOV.UK website:
To receive the basic State Pension, you must have paid or been credited with National Insurance contributions. The amount you receive is dependent upon the number of ‘qualifying years’ of National Insurance payments you have. This includes National Insurance contributions that you pay when you are working and contributions that are credited to you when you are unable to work.
For those who may not have enough ‘qualifying years’ for their entire state pension, they may be able to top up their NI contributions by making voluntary contributions. Further details can be found on the GOV.UK website regarding the number of ‘qualifying years’ needed for each person.
The basic State Pension increases every year by whichever is the highest of the following:
2.5%
earnings - the average percentage growth in wages (in Great Britain)
prices - the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
Therefore, you are guaranteed a minimum increase of 2.5% in your state pension every year.
You can continue to keep working and still receive state pension simultaneously whether paid or voluntary and this would not affect your state pension. However, it may affect other benefits, i.e., Housing Benefit, Council Tax Reduction and Pension Credit.
Private Pension in a Workplace
Private Pension Workplace schemes are a type of pension fund that you can set up to help you save and grow money simultaneously for retirement. Contributions are deducted directly from your wages whilst your employer may make contributions to your pension through the scheme. Your employer must make contributions to the pension scheme if you are eligible for automatic enrolment.
By law, your employer has to offer a workplace pension scheme to anyone who is eligible. This is called automatic enrolment.
You'll be eligible if you're:
aged 22 or over
working in the UK
under State Pension age
earning more than £10,000 a year
not already in a workplace pension
You can opt out of your workplace scheme but it may be a good idea to pay into it if you can afford to. This is because your employer must contribute into the scheme as well as yourself. Moreover, you’ll receive tax relief on the contributions you make into the scheme.
Types of workplace private pension schemes:
Occupational pensions
Stakeholder pensions or Group personal pensions
Occupational pensions are created by employers to provide pensions for their employees. There are two types of occupational pensions: Defined Benefit Schemes and Defined Contribution Schemes.
Defined Benefit Scheme:
In a defined benefit scheme, your pension is directly linked to your salary while you're working. Therefore, it automatically increases as you get a pay rise. Your pension is based on your pay at retirement and the number of years you have been in the scheme. In most defined benefit schemes, you pay a set percentage of your wages towards your pension fund and your employer pays the rest. This means it's usually a good idea to join a defined benefit scheme if your employer offers one. In this scheme, your pension entitlement is independent on the performance of the stock market or other investments. However, this type of scheme is becoming less common, and most employers no longer offer them.
Defined Contribution Scheme:
Defined Contribution Schemes involves paying money into the scheme which is then invested with the aim of giving you an amount of money when you retire. You'll usually pay a percentage of your wages into the scheme and your employer may also pay a regular amount in, but this isn't always the case. However, your employer may have to offer you automatic enrolment into a workplace pension, in which case they will be obliged to make contributions. The value of your pension pot can go up or down over time. This is because the pension provider uses the money to purchase investments, such as stocks and shares. The value of your pension pot will then rise and fall, depending both on how much money you put in and how well the investments perform. Investing is done with the aim of ensuring your “pot” of retirement money increases at least at the rate of inflation, so does not lose value over time.
If you're offered a defined contribution scheme through the workplace, it can be a good idea to join if your employer makes contributions. However, if your employer isn't going to make any contributions to the pension or you are not yet eligible for automatic enrolment, you may want to compare the benefits of the scheme with personal pensions schemes elsewhere.
Stakeholder Pensions or Group Personal Pensions:
Stakeholder pensions and Group personal pensions consist of your employer choosing the pension provider; however, you will have an individual contract with the pension provider. For this, you will pay contributions into your pension fund direct from your wages with the money then being invested to grow your fund leaving you with a pension when you retire. These types of pensions provide an alternative if you are not eligible to automatic enrolment for your workplace pension.
The main difference between arranging a personal or stakeholder pension yourself and joining one through your workplace is the amount of control you have over how the money you pay into your fund is invested. With a workplace scheme, the investment choices may be made for you by the provider.
Your employer may also pay contributions into a personal or stakeholder pension, but they do not have to. This will depend on the terms of the pension. If your employer won't be contributing, it’s a good idea to compare what the workplace pension offers with other similar pensions on the market to make sure you're getting the best deal.
Help - I’ve lost my pension!
Do you have a recent statement?
Most pension schemes send an annual report or statement, containing an estimate of the retirement income your pension pot can provide when you retire. This will contain the name of the pension scheme or its administrator. If you are not receiving these statements, the most likely reason is that you have moved or changed address and not informed your pension provider.
Have you contacted the pension provider?
If you do have a statement or you know who the provider is, your next step is to make contact. You’ll want to include as many details as possible from the list below:
your plan number (check a statement if you have one, even an old one)
your date of birth
your National Insurance number
the date your pension was set up (possibly around your start date at your workplace)
What if I don’t know the provider?
Assuming this is a pension that was arranged by a previous employer– not a private one you have opened independently – then you can go directly to your former workplace for more information. Even if your employer only provided access to a personal/stakeholder scheme, then they should be able to supply the provider’s details for you to follow up with. You will need to provide the former employer with:
your National Insurance number
the date you stopped working there
the date you started work with the employer
the dates you joined and left the pension scheme (if you know them)
You’ll need to ask what type of plan it is (defined benefit or defined contribution) and if it’s a defined contribution, then you can ask who your specific pension provider is.
Was your pension a defined benefit or based on your final salary?
If an employer can no longer pay the pension benefits guaranteed to its members, the Pension Protection Fund (PPF) can step in and provide the benefits (within certain limits). You can find a list of schemes the PPF looks after on the PPF website.
Still no luck?
Contact the Pension Tracing Service, a free government resource that searches a database of more than 200,000 workplace and personal pension schemes to try to find the contact details you need. You can phone the Pension Tracing Service on 0800 731 0193 or use the link below to search their online directory for contact details.