Pensions are always the hot topic among learners on the OU’s hugely popular free OpenLearn and FutureLearn courses, Managing My Money and Managing My Investments. They are also core in our seminal undergraduate course, DB123 You and Your Money, that aims to raise students’ own financial capability.
Research by senior lecturer in economics and personal finance at the OU, Jonquil Lowe, finds that people struggle to understand the value of a secure pension and underestimate the length of time over which they will need a retirement income.
Jonquil’s top tips for helping you save for your pension
Start saving early
Your retirement may seem a long way off but the earlier you start saving the better your chances of a good living standard after work. For example, for each £1,000 a year of pension from age 68, you’d need to save £30 a month if you start saving at age 25, but £53 a month if you leave starting until age 40.The government adds to your savings if you save through a pension scheme or Lifetime ISA. Usually, every £100 you save is topped up to £125 and your savings build up tax-free.
Understand your work pension scheme
If you save through a pension scheme at work, your employer must normally top up your savings too (as well as the government). Most people are automatically put into the workplace pension scheme (called automatic enrolment). You can opt out if you want too but you’ll lose the employer contribution, so that’s like turning down part of your pay packet.
At present, the amount you and your employer must pay into a workplace pension is low (just 2% of your pay, with you paying up to half). This is due to rise in April next year and again in April 2019. So you might notice a small rise in the amount deducted from your take-home pay, but you’ll also see your pension pot getting much bigger.
Top up your pension savings when you can
You can boost your pension savings by paying in extra. Many employers offer to match your extra savings (up to a limit), so check if that applies at your workplace.
Set up a personal pension if you are self-employed
If you work for yourself, make sure you set up your own personal pension (or you can join the national scheme, NEST). Although there’s no employer to help with the cost, you still get the government top up.
If you’re under age 40 you might prefer to save through a Lifetime ISA. Although it’s designed mainly for retirement saving, you can draw out money early to pay the deposit if you’re buying your first home. You can have a Lifetime ISA as well as one or more pension schemes.
Get to grips with charges
Charges have a big impact on your pension savings. An annual charge can sound small but mounts up over the years – for example, if charges take 1.5% of your savings each year, in total they’ll have eaten up around a fifth of your pension pot after 30 years. The maximum charge allowed for a workplace schemes is 0.75% a year.
Understand that very few people are average
The way the state pension age keeps rising may seem depressing, but people are living longer, so men are still likely to have a longer retirement than their grandparents. For example, a man aged 65 in 1997 could expect to live another 15 years on average. A man reaching age 68 in 2055 is expected on average to live another 23 years. However, a woman reaching age 60 in 1997 could on average expect to live another 26 years, while a woman aged 68 in 2055 could expect on average to live another 24 years.
One-in-five women and one-in-six men aged 30 today are likely to live until age 100! Use the government calculator to check out your chances.
Love your state pension
It pays out around £8,300 a year, is protected from the effects of inflation and is guaranteed to keep on paying out as long as you live. You’d need to build up a pension pot of over £230,000 to buy a similar pension privately.
Think before you give up an inflation-protected pension
Some workplace schemes also promise to pay out an inflation-protected pension for as long as you live (they have names like defined-benefit, final-pay or career-average schemes). Some firms are offering eye-watering amounts if you’ll agree to give these up – and, if you’ve reached at least age 55, you can then take a big chunk of this as cash in hand. But think carefully before doing this. The sums you’re offered are big because providing a good pension for life is expensive. If you give up this pension, you might be a lot poorer when you retire.