Dude, what’s my pension?!

By Grace Hetherington, Digital Campaigns Officer, ShareAction

30 April 2015

If there’s one thing we hear a lot at ShareAction, it’s how confusing people find the whole concept of pensions. Our work is focused on the positive possibilities you can unlock with your savings. So it’s important we provide some answers for the important, and sometimes frustrated, questions people have about their savings. Welcome to ‘Dude, what’s my pension?!’

The basics | Your money and the investment system | Pension power

The Basics 

What is a pension? 

A pension is a tax-free form of saving, which individuals usually contribute to over the course of their working life and then have access to once they retire. 

Pensión is also the Spanish word for guesthouse. Just to be clear, we’re usually referring to the first kind.  

What are all the different types of pension?

The state pension is a basic allowance that the government pays you when you reach state pension age (currently between 61 and 68). Almost everyone who has worked and paid National Insurance contributions gets a state pension. For most people, the state pension is not their only form of income in retirement – they have an additional pension to supplement it.

A personal or private pension is one you arrange yourself with a pension provider. You, and possibly your employer, give the pension provider a bit of your salary each month and they invest it on your behalf. Hopefully these investments will do well and your pot of savings will increase. 

A workplace pension, also known as an occupational or company pension, is a pension that’s organised by your employer. Usually, an employer will arrange one scheme for all its employees to join. You and your employer each pay in a certain amount each month and the pension provider will invest the money on your behalf, hopefully increasing its value.

What is a defined benefit pension scheme? 

This is a pension which promises to pay you a certain income when you retire. The amount usually depends on your salary and how long you’ve worked for your employer. It doesn’t depend on how the provider chooses to invest your money. Defined benefit pensions are rarer now, and most new savers will have a defined contribution pension. 

What is a defined contribution pension scheme?

In this type of scheme you are not guaranteed a set income on retirement. You know how much you put in each month but there’s no guarantee about how much you will eventually get out. This is because the amount of money you get when you retire depends on how well the investments have done. Most pensions are now defined contribution schemes. If your pension is a defined contribution scheme, you are vulnerable to any bumps in the economy which can cause your savings to decrease in value.

What is a contract-based or trust-based pension?

There’s another distinction between types of pension savings (stay with us, we are nearly there). A trust-based pension is one which is looked after by trustees. A contract-based pension is one which is provided by a pension provider like an insurance company. The distinction matters because the legal rules around how these different types of set-up operate are different.  But, trust us, it’s complicated!

What’s an annuity?  

An annuity is an arrangement which you currently have to buy when you retire if you have a defined contribution pension, to ensure your pension is paid to you in regular instalments for the rest of your life. Recent reforms mean that from April 2015 you won’t have to buy an annuity – in theory you could take all your money out in one go and blow it on holidays and cars. 

Do I get taxed on my pension? 

Two things are certain in life: death and taxes. So yes, you will have to pay tax on your pension. However, because the Government thinks that saving for a pension is A Good Thing, there are certain tax reliefs for pension savings.

I’m not sure who my pension is with. How do I find out?

Ask your current employer who provides your workplace pension. Information about this may be in your contract or staff handbook/policies. If you think you may have had pensions with previous employers, the Government provides a free pension tracing service. 

Can I change my pension provider?

Yes. You might want to change if you’re changing job, moving to a different country, or if you want to set up a private or personal pension. However, most people stick with their employer’s scheme. You can be charged fees for moving pensions. 

What is automatic enrolment and will it affect me?

Automatic enrolment refers to a fairly new law which means that if you’re aged between 22 and retirement age, earn over £10,000 a year and work in the UK, your employer has to enrol you in a pension scheme. You can choose to opt out if you want to. Automatic enrolment means millions more people have started saving for a pension. 

What is NEST?

NEST is the National Employment Savings Trust. It’s a new government-led workplace pension scheme which was created to help employers meet their new duties under automatic enrolment. NEST is the ‘default’ workplace pension for employers who don’t have another scheme in place. 

Shouldn’t I invest all my money in property instead? Or at least pay off my student loan?

It is not for us to say how you should use your money. But we all need some money to live off when we retire. Taking advantage of a workplace pension means your employer is making contributions alongside yours – it’s a great way to save as you get more money!  

What is an ISA?

An ISA is an individual savings account. It’s a way for individuals to save money or shares without being taxed on the interest earned on that money. Individuals have an ISA allowance – currently £15,000 – which they can save tax-free, split as they like between a cash ISA and a stocks and shares ISA.  

Why does all this affect me?

Because YOUR pension is YOUR money. Someone else may be managing it on your behalf, but you earned it, you’ll eventually be spending it and relying on it when you retire. It is as much your money as any savings you put in a bank or building society account.

This is all so complicated. I can’t be bothered to find out more. 

We know how you feel. But luckily – you don’t have to. You really don’t need to be a pensions expert to make a difference. The people who look after your money should be working in your interests, so you have every right to get in touch, let them know your opinion and make some noise if there’s an issue you care about which they could act on. 

More about your money and the investment system

What is a pension fund?

If you have a pension, your monthly savings will go into a fund with those of other savers. These funds of money are then invested in the economy, including in big, well-known companies. The UK pension fund market is worth £3 trillion. That’s a huge amount of individuals’ money which is invested in big companies. And that’s why pensions have got the power.

How can I find out how my pension is invested?

You can contact your pension provider and they should be able to give you information about where your money is. You can sometimes choose between different types of funds, but you don’t have a huge amount of control about where your money goes. We think it’s important that ordinary savers can understand exactly how their money is used. Unfortunately, this isn’t the case at the moment.

What is a shareholder?

A share is a divided-up unit of the value of a company. A shareholder is anyone who owns shares. A shareholder might be an individual or an organisation like a pension fund or asset manager who has invested savers’ money in companies. The directors of companies are accountable to its shareholders as they all own a stake in the company.

A public company is one whose shares can be bought by members of the public – so they can be held to account by the public. A listed company is a public company that is listed on a stock exchange, like the London Stock Exchange.

What is an AGM?

AGM stands for Annual General Meeting. This is a meeting that public companies are required to hold once a year, to which all shareholders have the right to attend. AGMs are held to elect the board of directors and to report to shareholders about the company’s activities and plans. AGMs are an opportunity for shareholders to vote on issues and raise questions with the board of directors.

Why are there fees and charges for my pension investments?

Fund managers and pension schemes will typically charge a fee for the service they provide – managing your money and growing your pension pot in the long-term. They pass on this cost to you. Unfortunately many pension schemes are not very transparent when it comes to explaining these costs to savers.

What is fiduciary duty?

Fiduciary duty is the legal idea that the people looking after your money have to act in your best interests. Duties are not clearly defined in law – for many trustees this is interpreted as ‘a duty to maximise financial return’ – even if this is at the cost of wider factors like the impact on people or the planet.

What is Responsible Investment?

Responsible Investment recognises that the value of investments can be seriously affected by the impacts of corporations on the environment, on workers and communities. Responsible Investment also places a high value on the way companies themselves are governed.

What are ‘ESG issues’?

ESG refers to environmental, social and governance issues. Environmental issues include things like the carbon emissions of a company. Social issues could be the wage it pays its employees. Governance issues involve how the company itself is run, for example how much it pays its top staff in bonuses.

Use your pension power

How can my pension make a difference?

The UK pensions industry is worth £3 trillion. That’s a whole lot of money which isn’t owned by the people who control it on a day-to-day basis, but by the millions of people who pay into a pension pot each month. Your money may be part of a complex financial system, but you have a say in the practices it funds. In fact, it’s because your money is invested in the system that you can influence how big companies use it to impact our society and planet.

ShareAction can show you how your pension has the potential to tackle climate change, improve working conditions and fair pay, and much more.

What can I actually do?

Loads of things! You can email your pension fund about specific issues to make your voice heard in the system and influence the way in which it invests your money.

You can join the AGM Army and ask the questions that matter in person to the bosses at Britain’s biggest companies. As a shareholder – even if you only own one share – you have the right to go to AGMs, meet CEOs and ask questions in person. Our AGM Army has successfully engaged some of Britain’s top bosses on the Living Wage, climate change, board diversity and much, much more. Or if you have shares but can’t attend yourself, you can allow someone else to go on your behalf.

You can even arrange to meet with your pension fund in person, bring issues you care about into their boardroom and meet other members of your pension scheme with similar concerns.

Can I engage with my pension fund on an issue that isn’t mentioned on ShareAction’s website?

We’d love to hear what issues you feel passionately about! We can help you contact your pension fund about them or take them to a company’s AGM.

Wow, I had no idea my pension had so much influence.

We know, right?! Pensions, FTW.

Colette St-OngeDude, what’s my pension?!