What is a State Pension?

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But retirement is so long away?

This is the thought everyone will have had at some point when thinking about their pension. Why should you be worried about how you are going to pay the bills at 65 when you are only 21?

In short, you shouldn’t. Retirement is a very distant thought for many who are being asked if they want to enrol in their workplace pension, but let’s see why it is incredibly important to start thinking about a pension properly when you are young.

What is a pension?

A pension is the amount of money you will be living off when you reach retirement age.

I keep hearing about a workplace pension?

Yes, thanks to the ad campaign with the “having another you at work” slogan, many will know about the workplace pension, and more importantly see their contributions being taken from their wages on a monthly basis. But what is it and is this the only pension?

Firstly, no, there are 3 main types of pension:

State Pension - This is the pension that the government pays out to ensure that people can actually stop working or slow down once they reach a certain age. At the time of writing this is currently £179.60 per week for those who receive full state pension. Find out more here.

Workplace Pension - This is a fairly new scheme. Both you and your employer pay into a “pot” every pay day, this is usually based on a % of your wages. For example you may pay 3% of £1,000 a month and they may pay 5% so £30 from you £50 from them. And then the Government top this up with tax relief. What you earn from this in retirement depends on your contributions and the growth of the pot as it is invested for you.

Personal Pension - Yes, another one. This pension is where you can open up a pot by yourself with an investment provider. Then you can top it up and contribute to it, as and when you want to. Like with the workplace pension, all your contributions receive tax relief (to a certain level.) This means that if you want to invest towards your retirement fund you can open up one of these pension accounts and start paying into it, with top-ups from the Government. It’s a win-win.

Why does it matter now?

As you may know from reading our section on investing, time is the biggest contributor to growth of investment portfolios. For context, for every £1 you invest at 18 this could be worth £20 at 65 (based on historical averages.) Whereas, if you invested at 30 (just 12 years later) at 65 your £1 would be worth only £8.66. This just proves why “time is money.”

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