Building a better retirement

Capital at risk. 
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{Intro}

Ah, retirement: the never-ending weekend.

The hustle and bustle of a 9-5, a distant memory.

But wait, before you get too far into dreaming about your perfect retirement (for me its waking up with a schedule fullllllll… of absolutely nothing), I’m here to clue you in on the fuel that’s going to power said dream: your pension!

So, future UK-based retirees, join me for this episode of BlackRock Basics all about retirement, and the options available in preparation of your golden years.

{What is Retirement?}

Basically, retirement is the time in a person’s life when they choose to permanently leave the workforce.

As you can imagine, this involves a lot of financial planning!

In the UK, there isn’t a default, or forced, retirement age anymore. It used to be 65, but now, you can pretty much work for as long as you want.

There are, however, some cases in which an employer can enforce ‘compulsory retirement’, like if the job has an age limit set by law, such as the fire service, or if it has any physical fitness limitations.

Like most other developed countries, the UK has a national pension and benefits system (hello free travel for all my England and Wales-based senior citizens!) to support retirees.

{What are Pensions?}

A pension is a financial plan that helps individuals save money for retirement.

Typically, people save and invest money during their working years to help provide a steady stream of income when they retire.

As of 2024, the average age of retirement for men in the UK is 65.1, and for women it is 64.

This is about a 0.25% decrease in the average retirement age in 2021, showing that people are retiring slightly earlier than they used to.

The earliest you can retire in the UK by moving money from your pension pot is usually after 55.

This is very conditional, with a lot of should we say, repercussions, but I had to flag.

{UK Pensions Landscape} 

In the UK, there are three main types of pensions:

1) State Pension
2) Workplace Pensions
3) Personal Pensions

So, let me take you through what each of these options are!

{What is the State Pension?} 

The State Pension is a regular payment you need to claim from the government when you reach state pension age.

This is currently 66 for men and women.

However, from 6 May 2026, the State Pension age will start increasing again and will reach 67 by 6 March 2028, affecting anyone born between 6 April 1960 and 5 April 1977.

You can find out your State Pension age and the date you will reach it by searching gov.uk state pension calculator.

The maximum amount a retiree will get from these payments depends on their individual working history, National Insurance contributions and credits.

{What is National Insurance?} 

I think it would be helpful if I explained what National Insurance, or NI is, since I’ve just mentioned it!

National Insurance is a tax on earnings paid by most workers.

Normally you start paying when you turn 16, are earning over a certain amount, and the contributions automatically come out of our wages for most of us.

Did you know our retired friends don’t have to pay National Insurance? I mean it’s the least they deserve.

Okay, back to state pensions.

The new State Pension is for those who will reach state pensions age on or after 6 April 2016 (so that should be everyone watching, if you’re retired and watching, I hope you are enjoying!)

The full new State Pension is £221.20 per week which works out to be £11,502.40 per year, and retirees are able to stay on top of any changes on gov.uk.

{What are Workplace Pensions?} 

Workplace pensions are set up by your employer. All employers have to provide a workplace pension scheme, and this is known as automatic enrolment.

So, how do they work?

To put it simply, a percentage of your pay is automatically put into your employers chosen pension scheme every payday – for us, it’s the last working day of the month.

And your employer also adds money into the pension scheme for you. This is a percentage of your earnings, with the legal minimum since April 2019, being 3%.

With you also contributing at least 5% of your earnings, this makes your yearly minimum pension contributions 8% of your total earnings.

It’s also very important to note that your total earnings is not only your salary or wages, but also includes:

- Bonuses and commission
- Overtime
- Statutory sick pay
- And statutory maternity, paternity or adoption pay

Oh, by the way, did you know that the government will usually add money to your workplace pension in the form of tax relief if you pay income tax?

{What are the different types of Workplace Pensions?} 

There are two main types of workplace pensions in the UK:

- Defined contribution, or DC

This is a pension pot based on how much is paid in over your working life.

- Defined benefit, or DB

This is usually a workplace pension based on your salary and how long you’ve worked for your employer.

If you choose to, or are currently enrolled in a DC workplace pension scheme, it is important that you know that as the money paid in by you or your employer is put into investments (such as shares) by the pension provider.

So, the value of your pension pot can go up or down depending on how the investments perform.

In fact, some DC schemes even choose to move your money into lower-risk investments as you get close to retirement age.

Therefore, there is no guaranteed annual pension at retirement.

On the other hand, if you choose to, or are currently enrolled in a DB workplace pension scheme, it is important to know that how much you get depends on your pension scheme’s rules, not on investments or how much you’ve paid in.

Also, the amount you get at retirement is usually based on lots of different things such as, your salary and how long you’ve worked for your employer.

Overall, with DB schemes, you are guaranteed an annual pension at retirement.

Interestingly, DC pension schemes are now the most popular in the UK for a number of reasons.

{What are Personal Pensions?}

Personal pensions can be opened to help save extra money in addition to your workplace pension.

These are fully controlled and managed by the individual, with a much wider investment universe to choose from.

{Key takeaways}

Regardless of how you choose to retire, it makes a lot of sense to put some money away for when you’re older, and that’s basically what pensions help you to do!

A nice way to think about pensions is like planting money apple trees when you’re young, and by the time you retire, you’ve got a whole savings orchard to harvest.

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