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By Erin Bisson, senior manager for BWCI Consulting
A READER has got in touch to say that their employer provides them with a defined contribution non-contributory pension scheme. They ask whether they are right in thinking that they don’t need to worry about retirement until they get there now.
While it’s great that your employer provides a pension scheme, it is important that you understand roughly how much pension you can expect from the pension scheme when you retire, so you can plan for a comfortable retirement.
A defined contribution scheme works a bit like a bank account. The amount in your “pension pot” builds up while you are working and the fund accumulated at retirement is used to provide a retirement income and, if you wish, up to 30% of it can be taken as a tax-free lump sum.
The amount in your pot at retirement will depend on three things: the contributions paid in, the investment return achieved (after fees and expenses) and the age at which you decide to retire.
The scheme is non-contributory, which means that your employer pays the contributions for you. You don’t have to contribute, although you may be able to add your own contributions if you wish to.
Make sure you understand how much your employer contributes and how you can add your own contributions to boost your pot.
When planning for retirement, think about the lifestyle you want in retirement, when you would like to retire and what other income you may have in retirement, such as your old-age pension.
Many pension schemes have an online pension projector to help you estimate your retirement income under different scenarios. Alternatively, you may prefer to talk to an independent financial adviser.
When considering how much income you will need in retirement, don’t forget about inflation – things won’t cost the same as they do now when you retire. Some calculators should have an allowance for this built in, but it is worth checking that.
Things will change over time, so it is important to keep a regular eye on your pension and retirement planning annually. It can be tax advantageous to save for retirement, so it is worth considering making extra contributions if you get an unexpected cash windfall.
In summary, having a non-contributory pension scheme is a great starting point, but don’t think about it as ‘job done’, without checking what benefits it is likely to provide.
