With many people starting their graduate schemes this time of year you may be offered entry into the company pension scheme and confused by the minefield of options and terminology used. Please post any questions you may have about pensions in this thread.
What is a pension scheme?
A pension scheme is a form of saving for your retirement. You will normally save a set percentage of your salary each month which then gets invested and (hopefully) grows. When you come to retire, this is then used to provide you with income so you no longer need to work.
State Pension
Most people will be eligible to receive some form of state pension. The amount you recieve will depend on the number of years you've worked and your national insurance contributions. Most people will currently receive about £151.25 a week, £7,865 per year (adjusted for inflation) from the age of 68. Both the amount and state pension age are likely to change. If you think £7,865 isn't much to live on, it's not! You need to be saving into another pension scheme also.
Defined benefit vs Defined contribution
There are the 2 main types of company pension schemes. Defined benefit means that when you come to retire you will receive a pre-defined pension amount each month. Defined contribution means that all of your money is put into a pot like a savings account with which you can then choose how much and when to withdrawal. Defined benefit schemes are becoming very rare as they often pay out far more than you put in, you're unlikely to be offered one of these schemes unless you work in the public sector. All the advice below is based off of a Defined Contribution scheme.
Why should I join?
There are 2 main benefits for saving in a pension scheme.
1: Your employer will often contribute some money. This is usually matched up to about 5%, so if you put in 5% your employer will put in another 5% to give you a 10% total.
2. Your contributions are before tax. This means that anything you put into a pension scheme is not taxed, saving you 20% or more depending on your tax bracket. Some schemes also offer your pension as Salary Sacrifice which means it is taken before National Insurance as well, saving you another 10%.
How much should I put in?
A general rule of thumb is to put in half your age that you start at as a percentage. So if you're 22 when you join the scheme, you should be putting in at least 11%. If you wait until you're 30 to join, you should be putting in 20% etc. The longer you wait before joining, the more you'll need to put in each month to catch up!
How much will I get?
Many people vastly over-estimate how much their pension will pay out! If you are on £30k and start putting in 11% from age 22 you'll eventually have a pension worth about £7k a year from age 68. Add this to the state pension and your total income will be about £15k.. half of what you were previously earning.
AVCs
Additional Voluntary Contributions are extra payments you make into your pension above what the company matches. So if you want to put in 15% total; you put in 5%, your employer puts in another 5% and you'll then put in another 5% of AVCs. This money is treated the exact same way as the other 2 contributions.
Why are pensions in the news so much?
Pensions are in the news so frequently because changes can have a big impact on people's lives for many years to come. In the past, some schemes have lost money either through mismanagement or criminal activity. Fortunately this kind of thing has almost entirely been eliminated so don't believe any older work colleagues who may try to convince you that all pensions are a scam.
Unfortunately the UK has a big problem with it's ageing population. As the population grows, the state pension budget is growing ever larger and many are predicting it will be reduced long before any of us reach an age to receive it. It is therefore so important that young people understand and start saving into pension schemes so they do not have to rely on the state pension to survive.
*Note: I am not a professional financial advisor. All the information here is to the best of my knowledge and belief to be true. You should always do your own research into any financial product. Most companies will offer free pension advice and have a recommended investment option which tends to be pretty good for inexperienced investors.