Yahoo Finance Millennial investor Q&A: the young person’s guide to investing in a pension
Marianna Hunt answers readers' questions about her attempts to invest her way onto the property ladder
I’m on a mission to beat the odds and use the stock market to take my first steps onto the property ladder within 10 years. After eight columns and a lot of Googling, I’m finally starting to get to grips with investing, but there’s always more to learn.
I want to share this knowledge as much as possible so I’ll be answering questions and responding to concerns sent to me by readers following my monthly columns.
In previous columns I’ve busted financial jargon, explained how I chose the first fund I invested in, looked at how to get free money towards your first home − and avoid hefty fees, and discovered how to invest my money so it has a positive impact on the world. The most recent one is on pensions and how little you can save while still managing to retire a millionaire.
Here, I answer some of your questions about pensions.
Q. What’s the difference between a private and a state pension, and can you have both?
A. Yes you can, and most of us will have both.
For anyone born on or after 6 April 1951 (6 April 1953 for women), to qualify for the full state pension you need to have paid 35 years' worth of National Insurance (NI) contributions. The amount then tapers down depending on the number of years you've paid NI for.
The new maximum state pension is £168.60 a week: however, it’s very unlikely you’ll be able to live off this, which is why you also need your own pension fund.
If you’re employed, you’re probably already paying into a pension with your employer thanks to auto-enrolment. However, these contributions are still relatively low, and to have a good income in retirement you should be paying in extra.
Q. I work freelance – how do I pay into a pension?
A. As a self-employed person, you’ll still receive the state pension, but you will not be able to pay into a workplace pension scheme because auto-enrolment does not include the self-employed. But you could pay into a personal pension.
There are three types of these: ordinary personal pensions, stakeholder pensions, and self-invested personal pensions. Each is suitable for different types of people so do you research before you choose. For a hands-off approach, an ordinary personal pension is best. You can open one through the government-backed scheme, Nest, for example.
The disadvantages of personal pensions are you miss out on the 3pc of qualifying earnings that employers must put into their workers' pensions under auto-enrolment, and irregular income from your business can make it hard to save into a pension each month. But it’s still really important to save into a pension.
Q. Is it worth waiting to pay more into my pension until I’ve paid off my mortgage?
A. No one wants to be saddled with debt in their later years, so if you can, try to pay off your mortgage before you retire, otherwise this will really cut into your disposable income. But if you’re able to both keep up with your mortgage repayments and contribute more to your pension, that is best – even if it’s just a small amount extra.
The longer your pension investments have to grow, the better. And, of course, you’d be missing out on valuable tax relief.
Q. Can you access the money in a pension before you reach pension age? Or do you have to be a certain age to use it?
A. Yes, you can access your pension from the age of 55 (13 years earlier than the current state pension age for a 20-something). You can take up to a quarter of your total pension pot as a tax-free lump sum - but you do not have to. The remaining 75% is taxable income so if you took the rest as cash or just some of it, there is a high chance your tax rate would rise when added to your other income. There are several things you could do with your pot. For example, you could buy a product that guarantees to pay you a regular income for life, or take the 25% tax-free lump sum and put the rest in a flexible-access drawdown fund.
In some very special and rare cases – for example if you're seriously ill – you may be able to take money from your pension at an even younger age.
But beware that if someone contacts you unexpectedly and says that you can access your pension before the age of 55, it's highly likely to be a scam. You could lose your pension and face a tax charge of up to 55% of the amount taken out or transferred, as well as fees charged by your pension provider.
Q. How can I find out what my pension is invested in?
A. If you’re in a workplace scheme, your employer or pensions provider should have sent you login details to view your pension page online. You can check on there. If you don't have these, ask your employer's HR or pensions department, or contact the pension provider if you know which one it is. Those with a personal pension can log into their account to see how their investments are performing.
Q. Are there different policies which you can choose? And can I pick what my pension is invested in?
A. There are two main types of pension: defined benefit (DB) and defined contribution (DC). Most DB pensions that used to be offered by many private-sector companies are closed to new members, and are now only really available to people working in the public sector. Most private-sector companies now only offer DC pensions, which is the type of pension used in auto-enrolment.
If you have a DC pension, which most people now have, you can have a say in how it is invested. Most are invested in a fund holding a collection of different investments that aim to keep growing your money until the date you retire. You can choose different funds which take more risk (with the potential for better returns) or less.
Q. Can I combine different previous workplace pensions so they’re all in one place?
A. Yes, you can usually transfer your workplace pension funds from previous employers into one pension fund, such as your new employer's workplace scheme or a personal pension fund. The downside of transferring your pot into a personal pension is your current employer is likely to be unwilling to pay into a scheme it doesn’t manage, so you risk losing those useful top-ups. When deciding to consolidate your pension funds, you should find out whether you will be charged to transfer your pots, and be aware that some pension providers may charge higher fees than others to do this.
Q. Does everyone who is employed qualify for auto-enrolment?
A. No. You have to be between the ages of 22 and the state pension age and be earning at least £10,000 per year to be auto-enrolled.
