Do you understand your pension? A recent survey of over 2000 UK adults showed widespread confusion about pensions. While more than half (53%) claim to be knowledgeable about pensions.  Yet, only a third could correctly identify what a Defined Benefit (DB – 35%) or Defined Contribution (DC – 34%) scheme is.  Furthermore, 20% didn’t know what type of pension they hold. 

Those aged 25–34 appear the most confident.  With 76% saying they were sure they knew what they needed about pensions. However, this confidence doesn’t necessarily equate to understanding.  For example, just 44% of this age group can correctly identify the characteristics of a Defined Benefit (DB) pension.  In contrast, only 45% know the features of a Defined Contribution (DC) scheme.

Ultimately, these findings point to 5 core pension steps that could help you better prepare for your financial future.

1. Understand your pension

Defined Benefit and Defined Contribution schemes have different structures and benefits. A DB scheme promises a specific remuneration at retirement.  Notably, this is often based on your salary and years of service. Whereby a DC scheme’s remuneration depends on the contributions made and investment performance. Hence, knowing the type of pension you have should help you plan your finances more accurately.

Meanwhile, a workplace pension is where employees save for their retirement through a scheme arranged by their employer.  A percentage of your pay is automatically deducted and put into the pension scheme. Furthermore, your employer also contributes to the pension, and you receive tax relief from the government. 

2. When can you access your pension

Understanding when you can access your pension is key.  Whether this is through your workplace scheme or the state pension. Ultimately, knowing when you want to retire helps you plan how much you’ll need to save. And how long you have to build up your pension pot.

3. Understanding tax relief

Pension contributions also come with tax relief. However, more than half (57%) did not know that the government contributes to pensions in the form of tax relief.  In particular, just 7% knew that the minimum level of tax relief starts at 20%.

Subsequently, a quarter (25%) of people with a pension have increased their contribution.  But nearly 18% of those who haven’t changed their contribution levels said they were unaware they could.

4. Manage your pension

While one in five (19%) people actively manage their pension investments.  Over half (55%) said they don’t know how their pension is invested. Moreover, the majority (81%) have never changed their investment strategy.  And 25% of those say it’s because they don’t know enough, or didn’t realise they could.

Understanding how pensions are invested is crucial for long-term growth. Different investment strategies can impact the growth of your pension fund.  So, risk tolerance and retirement goals are important considerations for your pension plan. 

5. Consolidate your pensions

Lastly, more than 69% of people have between 1 and 5 pension pots.  Moreover, a further 20% are unaware of how many they have. Of those who do know where their pensions are, nearly 35% don’t know how to access them. As a result, only 15% have consolidated their pensions.  Meanwhile, a further 46% are interested in consolidation, but unsure how to proceed.  Thus, bringing multiple pensions together can significantly help simplify retirement planning and reduce fees.

Do you understand your pension? Contact us for help with your pension and retirement planning. Call us today on 01603-957599 for your free initial consultation.