How To Start A Pension In The UK
Planning to live in the UK long-term? A pension is an important part of your financial future. It helps you save up so you can live comfortably after you retire.
Anyone who’s worked in the UK for ten non-consecutive years (and made certain National Insurance contributions in this time) is entitled to the UK State Pension. But you can also set up a workplace or private pension that gives you an additional payout after you retire.
Around 31% of adults in the UK don’t have any private or workplace pension savings, so they may have to rely exclusively on the State Pension. And even if retirement seems like a long way off, the sooner you start paying into a pension, the more you can save.
In this article, find out how to start a pension in the UK, so you can start saving for your future.
What types of UK pensions are there?
There are three types of UK pension: state, workplace, and private pension. Let’s take a look at the major differences between them.
When you reach the State Pension age, you’ll start receiving a regular payment from the government. This is the State Pension.
Your State Pension age depends on when you were born. And if you were born before 1953, it may also depend on your legal sex. Use the State Pension Calculator to discover when you’ll get your pension.
Your State Pension amount depends on how many National Insurance payments you’ve made over your working life. Everyone who works and is aged 16 or above pays National Insurance, providing they:
- Earn more than £242 per week from one job, or
- Are self-employed and make a profit of more than £12,570 a year.
How much State Pension will I get if I have never worked?
If you’ve never worked in the UK, you won’t have made enough National Insurance contributions to qualify for the State Pension.
In this case, you might be able to apply for Pension Credit to bring your retirement income up to a minimum weekly amount.
Every employer must offer their employees a workplace pension. Workplace pension schemes work by taking a percentage of your earnings and putting it into the pension fund every time you get paid.
Employers also contribute to your pension if you earn over a certain amount. So automatically enrolling in your workplace pension is an easy way to boost your retirement fund.
Workplace pension schemes work on an opt-out basis. You’ll automatically be enrolled if you’re 22 or older and work a set number of hours. So if you don’t want to be enrolled in your workplace pension scheme, you must tell your employer.
Private pensions are offered by individual banks and other financial providers. You can open a private or personal pension fund to diversify your investments ready for retirement.
Private pensions work in the same way as other pensions, but you can often choose how much to pay in. You’ll also have more control over where your money is invested, which is important if you don’t want to invest in certain products or services (like alcohol, tobacco, or fossil fuels).
Will I pay tax on my pension contributions?
Workplace and private pension contributions are tax-free (up to 100% of your annual income).
With a workplace pension, the contribution is put into your pension pot before you’re taxed.
With a private pension, the government will reimburse you for any contributions you make via your pension provider. This is known as tax-relief at source, and it usually means your contributions are topped up by 20%.
If you’re a higher rate tax payer, or your pension contributions are more than 100% of your annual income, you may need to complete a self-assessment tax return to claim all the pension tax relief you’re entitled to.
When you take your pension in retirement, you’ll be taxed on this the same way as with any other income.
Can I start my own pension?
Yes, you can start your own pension. But it’s important to consider whether this is the right decision for you financially.
If you’re not enrolled in your workplace pension, it may be better to enrol rather than opening a private pension. That’s because your employer tops up your pension contribution, so your pension grows without you having to contribute as much from your salary.
Can I start a pension without a job?
If you don’t have a job, you can still open a private or personal pension fund. But you’ll need some income to put into your pension. If you receive benefits like Universal Credit, you can pay a portion of this into your pension fund.
Private pensions are also popular with people who are self-employed as an alternative to a workplace pension.
When should you start a pension?
It’s never too late to start paying into a pension. But it’s a good idea to start paying into a pension as soon as you can afford to.
The earlier you start saving for retirement, the more money you’ll have to live comfortably when you’re older.
How much should I put into my pension?
If you’re automatically enrolled in a workplace pension, you’ll need to contribute at least 8% of your qualifying earnings (normally your annual salary minus £6,240) to your pension.
Of this 8%, your employer must pay at least 3%, so you’ll usually contribute an additional 5%. For example, if you earn £1,000 a month, you’ll pay £50 and your employer will pay £30 into your pension, giving you a total monthly contribution of £80.
You and/or your employer might need to pay more depending on your pension scheme rules. You can also choose to pay more into your workplace pension if you want to.
For a private pension, the amount you contribute is up to you. But your pension provider might require you to make minimum or maximum contributions over the year.
This graph from 2017 shows how much you’ll need to contribute to get a £20,000 pension by the time you retire, depending on when you start saving. Bear in mind these figures will vary based on your actual salary, and other financial factors:
How to choose a private pension
There are lots of private and personal pension providers in the UK, which can make it tricky to decide which one is right for you. Here are some things to consider when choosing a private pension:
- How much do I have to contribute each month/year?
- Is there a maximum amount I can contribute?
- What are the charges to open the pension?
- Do I need to make regular contributions, and can I afford to?
- Can I make individual lump sum contributions?
- How/where does the provider invest my money?
- Can they help me monitor or track my pension contributions?
- How can I access my pension account?
If you’re still not sure, it might be a good idea to seek advice from a trustworthy financial advisor. They can discuss your financial circumstances to help you find the best private pension for you.
Otherwise, you can open a private pension directly with the provider, as long as you meet their criteria.
Add to your pension pot with Bloom
Securing your financial future in the UK means lots of forward planning. If you’re not sure the pension you’ve accrued will be enough for a comfortable retirement, think about saving a little extra and topping up your pension pot.
Use Bloom to save extra contributions to your retirement fund. Save together with friends and family to build wealth among your whole community, ensuring you can all live prosperous lives right here in the UK. Download Bloom to start your community savings club.
UK pension FAQs
Here are some of the most frequently asked questions about starting a UK pension.
What happens to your UK pension if you move abroad?
If you’re eligible to claim the State Pension, you can still do this if you live overseas. It can be paid into a UK or overseas bank account.
Workplace and private pensions won’t always allow you to receive your pension to an overseas bank account. In these cases, you can transfer workplace or private pensions to an overseas pension. This also means you’ll receive the money in your local currency instead of GBP.
Do I pay tax on my pension if I live abroad?
It depends on whether you’re considered a UK resident for tax purposes. If you are, you’ll have to pay tax when you receive your pension.
If you’re not, you probably won’t need to pay tax on your State Pension when you receive it, but may still need to pay tax on any other pension income.
Am I eligible for the State Pension if I’m not a UK citizen?
Yes, as long as you’ve made the required National Insurance contributions in the UK. The amount you get will depend on how many National Insurance contributions you’ve made.