This is a common question, that I get asked during my daily job role – how do I set up a pension with the UK.
So let’s give some simple steps to help you !
The first thing to consider is your current employment status.
If you are employed, your employer is legally required to automatically enrol you in a workplace pension.
Auto-enrolment was introduced in 2012, to provide greater pension provision in the UK through opting into a workplace pension.
See my blog post specifically on Auto-enrolment being :https://moneyminted.co.uk/auto-enrolment-pensions-a-basic-introduction
This is somewhat different if you are self-employed or want to top up your savings, you can easily open a personal pension (or a SIPP) online yourself in a matter of minutes.
So what is Auto-Enrolment:
If you are aged 22 or older, earn over £10,000 a year, and work in the UK, your employer must automatically enrol you in a workplace pension scheme.
How it works:
You contribute a minimum of 4% of your qualifying earnings, your employer must contribute at least 3%, and the government adds 1% in tax relief, so a total of 8%.
Some workplace pensions will offer higher contribution rates, to attract staff as part of incentive or benefits package.
(My current employer pays in 5% and I contribute 10%)
On joining an employer, the HR team will normally provide you with forms to join or opt-in. This could be straight away or after an initial probation period.
You will be given a plan number and access to online account or portal, so you can manage it in future.
The level of contributions are based on earnings between £ 6,240 up to limit of £ 50,270 (as per the 2026/27 tax year). This is known as “qualifying earnings”.
You can the contribute contributing to age 75 and get tax-relief for your employer – so free money.
This is automatically claimed on your behalf and added into your pension plan.
Personal Pension (If you are self-employed or want a private
plan)
If you are self-employed, a company director, or simply want an additional retirement fund, you can set up a personal pension or a Self-Invested Personal Pension (SIPP).
How it works:
You make regular monthly payments or lump-sum contributions. The
government adds basic-rate tax relief to your pot automatically (e.g., if you contribute £100, the government tops it up to £125) , if you are basic rate tax-payer. If higher rate you claim claim relief via gov.uk.
Setup: You can apply directly online through providers such as :
Setting up an account typically takes less than 10 minutes. You
will need your personal details, such as name, address, National Insurance number, and bank Information.
So where are my contributions invested ?
Most people will simply be automatically placed into a default Investment Option with their workplace pension.
It could be based on age in a lifestyle or target date fund, So as you get nearer to retirement, the funds are placed into less risker assets to limit possible loss or liability in the later years just prior to accessing.
So check with the scheme, what is the default age it could be 55 (Minimum pension Age), 60 , 65 or linked to your state pension age currently 66 soon risen to age 67.
Be aware:
Increase to minimum pension age, (MPA) it is currently set to age 55.
But this will be increased to age 57 from 6th April 2028. So you could be affected in future years.
You could access a pot earlier if you have serious ill-health or it is inherited.
So how much can I contribute !
You can contribute more money if you wish and it is affordable.
Everybody has something called the Annual Allowance.
Currently £ 60,000 per tax year or lower amount up to your salary. So if you earn £ 30K per annum, you can contribute up to £ 30K per annum.
It covers salary, income and bonuses, but not pension income, rental income, dividends, savings income
If you do make sizeable contributions you could increase your contributions through carry forward.
This allows you to use any unused allowances from the previous 3 years.
Could prove to be valuable if you receive annual bonus, legacy or inheritance or sudden windfall.
If you aren’t working, you can still contribute but your annual is restricted to £ 2,880 net and HMRC will add tax-relief up to £ 3,600 gross per tax year.
So how do pensions work !
Most people know will be set-up in a defined contribution (DC) pension plan.
So the amount in the pension pot will determine what future benefits you will have in later years when you decide to access.
It depends on certain factors:
- The amount of contributions that you pay in,
- How the funds perform when invested,
- fees and charges applicable to your provider
Ideally the earlier you start the better you pot value will be. Solely due the the power of compounding.
Your pot value may start off small and grow little in the earlier years, but will be like a snowball gathering momentum in the later years.
So use the calculators on offer on your providers website to look at future illustrations.
The earlier you start the better your pot will be at the time of retirement.
For most people it’s their 2nd biggest assets after their home.
I believe I can access 25% tax-free !
Yes, that’s correct under pension rules.
Across all schemes you are permitted to withdraw 25% tax-free (subject to total limit of £ 268,275 across each scheme you have)
With the remaining funds you can buy an annuity to give you guaranteed income or drawdown (FAD) doing on your terms.
Again see the following blog posts on each these products:
https://moneyminted.co.uk/annuity-or-drawdown-which-option-is-better-for-me
If you go through your employer, you will normally set-up within a group personal pension plan, which offers funds you can select if you wish.
With the fees and charges determined by them, but sometimes at a discounted rate if you work for large employer.
For yourself, it may be different, you could be set up in a standard personal plan, stakeholder pot with capped fees and charges applicable.
If you choose your own SIPP, you will have much wider range of investments, shares, funds, stocks to buy, but you will have to do it yourself.
So are you comfortable picking your own funds and reviewing and monitoring them moving forwards.
To the vast majority, the idea of investing and picking funds themselves is complex, confusing and outside their comfort zone.
However though, the SIPP provider will have lots of tools, webinars, investment guides, web chats and FAQ’s to assist you.
Do some kind of comparison !
If you are going to set-up your own pension plan, consider the following:
- level of monthly fees payable, may be fixed or based on the size of the pot.
- what investments do they offer,
- is their website, APP or platform easy to use and user friendly,
- have you used them before do they provide good service.
- can you make minimum level of contributions
- can you make ad-hoc top-ups
- what products do they offer when accessing in later years.
- do they offer investing guides, webinars, support etc.
Is my new provider safe !
All providers should be regulated and approved and conform to guidelines set by the Financial Conduct Authority (FCA).
The money should be ring-fenced and fully protected.
You can checkout a company via the following website.
Ahead of using a company, look at reviews, testimonials and do you research and background checks.
You should have a cooling period, normally 30 days if you do change your mind.
Be aware of SCAMS !
If you do join a workplace pension directly your employer should provide relevant details about setting up the pension.
Or if you are using a 3rd party or doing it yourself – take your time and don’t feel under pressure.
Remember your money will be locked away and invested for many years.
At present, it is illegal to be cold-called over pensions.
You can report a company to Report Fraud or the Information Commission Office,
If you are unsure or feel anxious, take a step back and take time to make the correct decision.
Only enrol or sign up if you feel happy and confortable doing so.
Unfortunately, people believe good spiel, patter and glossy websites and marketing materials,
Nobody should care more about your money than you. So take extra care when setting up your plan. Plus, also in the later years when you do decide to access.
Once set-up – review it !
After you have been making contributions for most time, your pension provider should provide you will an annual statement showing monthly contributions, funds and units held, fees and charges, profit / loss, selected retirement date and details of any special features.
Most people will just see a statement and out it away for future years.
- But make a conscious decision to get actively involved in your statement as it grows.
- Are you contributions on track to provide a sizeable pot ?
- Are you making or losing money year on year ?
- Do you increase level of contributions ?
- What are the illustrative figures for later years ?
- Do you need to change your investment funds, due to poor performance ?
- Has your attitude to risk changed as you get older ?
You shouldn’t be looking at the pension everyday, but make a decision to review it at least annually.
It may be one of the best investment decisions you make. As the years will soon flyby and the age of retirement comes quicker than you think.
Remember:
If you found this blog post useful and informative check out my other posts on savings, investments, pensions and investing books I recommend on http://www.moneyminted.co.uk
So you too can reach your investment goals and aims.
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