How to get an A* in pensions

Teenagers up and down the UK will (hopefully) be celebrating A-level results today, but only a handful will be leaving college or sixth form with a qualification in personal finance.

Thankfully the situation should improve soon. From September 2028, financial education will form a bigger part of citizenship classes.

Teaching children and teenagers about budgeting, saving and borrowing gives them crucial life skills before they leave home. But this is also the time to teach them about pensions – however distant their retirement might be. 

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The best way to build the retirement pot you’ll need isn’t to hope for a well-paid job; it’s to start saving something, as soon as you possibly can. Yet without any pensions knowledge, that early opportunity is easily missed.

Even for those who’ve been working for decades, there’s a huge pensions knowledge gap that’s hindering our ability to save for retirement. One in five don’t know what type of pension they have, according to a survey from Aviva, and over half (57%) don’t realise that they get a free top-up from the government every time they pay into their pension.

With that in mind, here’s everything young adults need to know about pensions before they start work (and a handy reminder for anyone else that needs it).

1) Your employer will automatically enrol you into a pension – don’t opt out

All employers must sign you up to a workplace pension and pay into it on your behalf (so long as you’re 22 and earn at least £10,000). Currently, the minimum contribution is 8% of your qualifying earnings (the band between £6,240 and £50,270) – that’s made up of 3% from your employer and 5% from you.

You’ve got the right to opt out if you want, but you’ll miss out on two free top-ups if you do: your employer’s contribution and government tax relief (which we’ll get to in a bit).

2) Pay more into your pension – if you can

Saving 8% of your qualifying earnings is just the minimum required by pension rules. It’s unlikely to be enough for a comfortable retirement so, if you can afford to pay in more, you should.

This is particularly important for higher earners who will see their pension contributions plateau once they earn more than £50,270, if they’re only paying the minimum.

3) The sooner you start saving, the less you’ll pay overall

When you’re strapped for cash, it’s easy to park retirement saving until you’re earning more. But the earlier you start saving and the more time you give your pot to grow, the bigger your pot will be and the less you’ll need to pay in.

This is thanks to the power of compounding – where your returns start earning returns over time, a bit like a snowball getting bigger as it rolls down a mountain.

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Take someone who pays a modest £100 contribution into their pot each month from age 22. Assuming a 5% annual return, they would have invested £55,200 and have a fund worth £214,239 by the time they’re 68.

But, if they left it until they were 40 before they got going, they would struggle to catch up. Even if they doubled their contribution to £200 a month, they would have invested a total of £67,200 and only have £146,084 to show for it.

It’s a simplistic example, but it shows that the sooner you start, the better off you’ll be.

4) There are two types of workplace pension – know which one you’ve got

Most companies will offer you what’s called a defined contribution (DC) pension. Your contribution is invested each month and the amount you eventually get will be based on how much you paid in, your investment’s performance and the charges on the plan. DC pensions are flexible and it will be up to you to decide how you’ll eventually take income from your pot.

If you work in the public sector, however, you’ll get a defined benefit (DB) pension. These pay an income for life, once you have retired, with the amount you get based on your salary, the generosity of the scheme and the length of time you were in it. They aren’t flexible in the same way as DC pensions, but your income is guaranteed and you don’t need to manage it yourself.

5) The government pays into your pension too – make the most of free top-ups

To encourage us to save for retirement, the government offers tax relief on pension contributions.

This effectively means that you don’t pay tax on money you pay into a pension. So, it costs basic-rate taxpayers £80 to pay £100 into their pension and higher-rate taxpayers just £60.

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Over your working life, this can make a big difference to the eventual size of your pension and the more you pay in, the more you’ll get from the government. It’s also why (for most people) pensions trump other wrappers, like individual savings accounts (ISA), as the best way to save for retirement.

Just note that how tax relief is applied depends on your scheme. Many workplace pensions apply the full rate of relief automatically. But personal pensions (and some workplace schemes) will just apply basic-rate tax relief. That means if you pay higher or additional rate tax, you’ll need to claim the additional 20% or 25% that you’re entitled to back from HMRC - either through your tax return if you do one, or its online claims service.

If you’re not sure how your employer’s scheme works, check with HR.

Each year you can pay in 100% of your earnings, up to £60,000 a year, into your pension and get tax relief on your contribution.

6) Find out how much your employer pays in – and whether they’ll match your contribution

It’s important to know how much your employer pays into your pension. They must pay in 3% of your qualifying earnings, but this is just the legal minimum and some companies will be much more generous. For example, they might base their contribution on your whole salary, not just your qualifying earnings. Or, they might pay a higher percentage.

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Some employers will also match your contribution, so the more you agree to save for retirement, the bigger the top-up you get from them.

7) Learn what to do when you change jobs – how to keep on top of your pensions

Your pension won’t move with you when you change jobs. Contributions will stop and it will be left where it is, bubbling away. You’ll then get another pension from your new employer.

So, if you’re changing jobs pretty regularly, you could end up with quite a collection.

Keeping track of multiple pensions with different providers can be a headache. For many people it will be easier to combine any you no longer contribute to into a personal pension, like a self-invested personal pension (SIPP). Not only will this make it easier for you to see how your retirement savings are progressing, it could also give you access to a wider choice of investments and save you money. That’s because online SIPPs can be cheaper than dormant workplace pots.

Then, each time you move jobs you’ve got a pot to move the pension into.

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Pension consolidation makes sense for lots of people but it’s important to check whether you’ll lose any valuable benefits first. You’ll also need to be willing to choose your investments with a SIPP, but good platforms offer solutions like ready-made portfolios or quick-start funds, for those who aren’t confident researching investments themselves.

8) Understanding pension access – don’t pay in money you’ll need before you retire

Your future self will thank you for every penny you pay into your pension, but it’s important not to pay in money you might need before you reach the minimum pension age. That’s currently 55 but it’s rising to 57 from 2028.

For medium-term savings, it’s worth considering a stocks & shares ISA on top of your pension. You won’t get tax relief on contributions, but you can access your money if you need it and all withdrawals are tax free.

When you access your pension, you can take 25% tax-free, the rest will be taxed as income.