Pensions – workplace / personal / state?

Pensions might seem far away now but you need to understand how they work and how to ensure your earnings are working hard for you so you can enjoy your retirement!

Pensions – workplace / personal / state?

A pension is the act of your wages being deducted to save for retirement. Mr Financial splits them into three umbrella categories:

  • Workplace pensions
  • State pensions
  • Personal Pensions


Defined contribution pensions are the most usual pension scheme. You as an individual build up a pension pot using your contributions and your employer’s contributions (if applicable).

Due to auto-enrolment that’s now in place, if you’re working as an employee, you should be auto-enrolled into a pension scheme (Currently, enrolment is automatic for people over the age of 22 or over earning a minimum of £10,000 from one single job.)

How much you save is dependent on how much you earn because a contribution is a percentage of a salary. Therefore the more you earn, the larger the amount of money goes into the pension pot. The minimum contribution from your pre-tax salary that has to go to your pension is 8%. The minimum that an employer has to give is now 3%. The government provides 1% tax relief. So your minimum employee contribution is 4%.

Auto-enrolment is a great government initiative; if your employer gives you access to a pension that they will pay into, opting out is the equivalent of turning down a pay rise!


 Stage 1 – While you are working

The pension fund is usually invested in stocks and shares and other investments. The aim is to increase the capital over the years before you retire.

If you have an interest in investing, you may choose from a range of funds to invest in, or you can also let the fund manager run it.

Stage 2 – When you retire

55 is the magic age, you can access and use your pension pot however you want. However, any money released is subject  to the following tax rules – the first 25% is tax free but after that it’s taxed as regular income and therefore if you release too much at once – it might push you into a higher tax bracket. The options are:

  • Release your whole pension pot as a lump sum in one go
  • Release lump sums as and when you need them
  • Release gradually to provide a regular taxable income
  • Release a quarter of your pot as a tax-free lump sum and then change the remainder into a taxable retirement income (known as an annuity)


The state pension is a regular payment from the Government and is a basic pension provision. This was invented to prevent old age poverty. Men and women over the age of 65 are entitled to claim state pension (it’s increasing to 66 in October 2020)

A State Pension is based on a person’s National Insurance record. It analyses the National Insurance you built up before the new State Pension came in in 2016, as well as contributions since 2016. The key is not everyone will get the same amount.

The full amount of new State Pension is currently £168.60 a week – (c.£8,750 a year), but people should check their State Pension online.

When people do check, your National Insurance record is shown, and at that time you may be able to improve it by filling gaps, claiming National Insurance credits, or making voluntary National Insurance contributions.

10 qualifying years on your National Insurance record are required to get the new State Pension, but people should check to see how individual circumstances affect National Insurance records.


If you’re auto-enrolled at your workplace you don’t need to make a personal pension plan. However, if you’re not, you should be planning your retirement. There are four types listed below and it is worth properly researching them to make sure you choose the best for you.

    • Defined Contribution pension (works identically to workplace version, except that your employer does not pay into it)
    • Stakeholder pensions (very similar, just a different type of investment)
    • NEST pensions (for self-employed as they’re Master Trusts and contain many employers / self-employed people etc.)
    • Self-invested personal pensions

Always research what’s the best plan for you and ALWAYS remember to get all your pension information from your employer when you move jobs. You’ll need it as you need to liaise with the pension providers. If you have lots of pots – there is also a service to consolidate your pensions but beware of high fees attached to some of these services.

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