Retirement might seem like a long way off but if you're working in the UK there's no reason why you can't continue putting money away for your future.
It’s generally accepted that the state pension alone is unlikely to provide a sufficient income during retirement. Nowadays we’re living longer and expecting more from our retirement years, so we need more money than previous generations.
It’s never too early to start saving for a pension — and while it may be difficult to look at the bigger picture while you’re in the UK, working away from home should not be an excuse to slack on your future. All of us pay National Insurance (NI, so you may as well get something back by transferring those payments into a fund of your choice back home. Moreover, many of you may be provided with a company pension while in the UK, so it’s a good idea to know what you can get out of that. You need an idea of what pensions are available to you first.
How it works
The basic principle behind a pension is that you make payments, whether on a regular basis or as one-off amounts, to an insurance company to help you fund your retirement. These payments are invested on your behalf in a range of different products to build up a pot of money that is then used to provide an income during retirement.
These investments are commonly known as funds. Most insurance companies offer a selection of funds that invest in a variety of assets, for example equities (company shares) or property. Pension provider Standard Life says the objective of most funds is to invest in assets that will increase in value over time, although this cannot be guaranteed as the value of certain assets can go down as well as up.
When you reach your selected retirement age, you take the money saved up in your pension and use this to provide an income for the rest of your life by purchasing a financial product called an annuity from an insurance company. This could be from the same company that provided the pension or from a different company. As well as providing an income for life, in most cases it’s possible for some of the pension pot to be taken as a tax-free lump sum before you buy an annuity
Basic state pension
The basic state pension is paid for by National Insurance contributions and the taxes of those working. The amount you receive will depend on how many qualifying years you build up before state pension age. A qualifying year is any year with an NI contribution record for each week of that year.
Men need 44 qualifying years to get a full basic state pension. Women who reach 60 before 2010 need 39 qualifying years, however if you reach state pension age on or after April 6, 2010, you will need 30 qualifying years for a full basic state pension. If you haven’t got a full contribution record, you can still receive a smaller basic state pension based on the number of qualifying years you have. You’ll normally need a minimum of 10 or 11 years to qualify.
More information is available from the Pensions Advisory Service. For 2008/09 the full basic weekly state pension for a single person is £90.70 and £145.05 for a couple. Many people opt to supplement their state entitlement by saving into another pension. At the moment, people receive their basic state pension on top of any other pension they have.
State second pension (S2P)
S2P is an additional ‘top up’ state pension paid for by NI contributions and linked to earnings. You can leave, or ‘contract out of’, S2P and direct some of your NI into a personal or occupational pension scheme instead. If you’re thinking of contracting out, make sure you seek expert advice first.
Occupational or company pension
Occupational or company pensions are set up by an employer for their employees. If you’re offered a company pension scheme, it usually makes good sense to join it as your employer may make regular and/or lump sum payments into your retirement fund and you will usually be able to make extra payments as well.
Employees who leave before retirement have various options for what happens to their pension fund, depending on their personal circumstances. When they come to retire, they’ll normally receive their pension in line with the rules of the company pension scheme. An employer who doesn’t run a work scheme may offer access to a group personal pension instead.
This is a collection of personal pension plans grouped together to make administration costs more effective and to maximise investment growth and otherwise reap some of the benefits of clubbing together.
Personal pension
If your employer doesn’t offer a company scheme, or if you’re self-employed, you could consider paying into a personal pension. This means paying a regular and/or lump sum to your pension provider, who invests the money on your behalf. You use the fund that has built up to provide your income at retirement. A stakeholder pension is designed to be more straight-forward and have lower costs than some other types of company or personal pensions, which means it suits people with no income from employment.
Remember that all pensions are taxed. You can claim a rebate when you shift it back home. Ask at your tax office for more information.