For Talk Money Week, David Anderson, Relationship Manager in our Financial Education team, explains why pensions are essential for later life.
Why are pensions important?
Pensions play a big role in looking after your future self and making sure you can live comfortably in your retirement.
With the current cost of living crisis, people without a sufficient pension are struggling to make ends meet. Although you get a state pension in the UK, it’s not enough to cover everything. This is why it’s recommended to have a work-based or private pension to supplement it.
To get a better understanding of how difficult it is to live solely on your state pension, I took part in the BBC programme ‘Living like a pensioner.’ I had to live on £185 a week – which is the amount you receive for your state pension. I kept a video diary documenting my week, and a spreadsheet to keep track of what I was spending.
During this week, I had to be very mindful about allocating money to essentials. Although I had some money left over, it was tight.
The aim of the programme was for working people to experience life as a pensioner. The message was clear – a state pension is only sufficient to cover the basic costs of living, and these continue to increase too. Costs don’t stop when you stop working, but your income does.
What are the different types of pensions?
There are different kinds of pensions. Defined benefit pensions are when you’re given a set amount based on your salary and length of service at your company.
However, most people these days have a defined contribution pension. This is where you contribute into a pension fund offered by your employer, who also contributes a percentage to your fund on your behalf.
As these funds are usually invested in the stock market, returns can vary and there’s no guarantee that you will get back what you paid in. However, the benefits are that usually, over a long period of time, returns are evident though this all depends on the performance of the market.
There are other benefits, notably your employer’s contribution to your fund which in some cases is matched up to 100% of your individual contributions. This depends on your organisation’s policy, and there are also tax advantages when this contribution is deducted from your salary.
Keeping track of your pension
Some pension providers have an app where you can check the value of your pension. This gives you an insight into what your pension will look like at the time of your retirement, based on what you’re currently contributing.
Often when you move from a company, you get enrolled into a new pension scheme and forget about your pension from your previous workplace. Currently, there’s nearly £27 billion worth of unclaimed pensions in the UK.
These unclaimed pensions are still in the system and can easily be tracked. If you haven’t worked at many companies, a quick way to do this is to contact HR at your previous employer and ask them to check your old record. Alternatively, if you’ve worked at multiple companies this could be time consuming. Luckily, you can also track your pensions through the gov.uk website.
Financial education and pensions
Pensions are a part of the curriculum for our financial education qualifications, from level one to level three. Students learn how important it is to look after your current self, but also to plan for your future self.
One way to make learning about pensions engaging is to take a more interactive approach. Students can be given the task to live on a set amount and keep track of their experiences and what they learn.
Financial planning is all about making decisions that allow you to be financially independent, throughout your working life as well as your retirement.
Find out more about our financial education qualifications