WORKPLACE SAVINGS GUIDE

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1 WORKPLACE SAVINGS GUIDE START HERE. We understand that pensions can be confusing and difficult to understand. That s why we ve created this guide, to explain to you how they work and why they re so important for your future. GET STARTED

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3 By the time you reach retirement it s unlikely that the State Pension will provide you with the lifestyle you hope for. You may want to avoid thinking about pensions but don t you want to maintain, or even improve, your quality of life as you reach retirement? To give you a better understanding of how important saving for the future is, there are a few myths that need to be cleared up MYTH. I PAY NATIONAL INSURANCE SO I CAN RELY ON THE STATE PENSION. FACT. The current Basic State Pension is no longer enough for most people to live comfortably on. This is set to get worse as people live longer and the age at which you can claim it increases. If people continue to avoid saving independently then they will be destined to many more years working than planned and a lower standard of living on retirement. MYTH. I M TOO YOUNG TO THINK ABOUT RETIREMENT. FACT. It s never too soon to start saving for your future. The sooner you start saving the better off you re likely to be when you retire. Paying in small amounts over a long time is far more affordable than having to pay more when you re older to catch up. As an investment, the pot of money in your pension fund will benefit from having time to grow. Acting now gives you the biggest chance to take advantage of that growth. CONTINUED OVER WORKPLACE SAVINGS GUIDE DON T BELIEVE THE MYTHS 3

4 DON T BELIEVE THE MYTHS (CONTINUED). MYTH. IT S TOO EXPENSIVE. FACT. You may be missing out on free money if you don t have a pension. If you join your employer s pension plan rather than a private pension, your employer may make contributions. The Government will also add tax relief to your own contributions. To summarise, the money you pay in might make up only a small percentage of your overall contribution. MYTH. IT S ALL TOO COMPLICATED. FACT. To join your employer s pension all you have to do is fill in your name and a few simple details and your employer will organise the rest for you. From then on your contribution will be taken from your salary automatically. If you require further information at any time simply ask your employer and they ll provide you with all the information you need. MYTH. HAVING A PENSION WILL TIE ME TO MY EMPLOYER. FACT. You re not tied to your employer because of your pension with them. When you change your job you can take your whole pension fund with you. You ll no longer get your previous employer s contribution but your new employer might offer a pension scheme into which you can transfer your fund and continue paying. MYTH. I M BETTER OFF SAVING INDEPENDENTLY. FACT. If you opt to save independently you might miss out on employer contributions. You might also save money if you save through salary sacrifice. This is where your contribution is taken before you re taxed, reducing the amount of your monthly pay that is taxed. Saving through your employer will also simplify the process as they will deal with all the administration behind your pension, leaving you to focus on living your life. WORKPLACE SAVINGS GUIDE DON T BELIEVE THE MYTHS 4

5 WHY START SAVING FOR RETIREMENT? PLANNING AHEAD Have you ever thought about how much income you ll need to live on when you stop working? Or, more importantly, where this money will come from? You may just be beginning to put money aside or maybe you ve been saving for a few years. Whatever your situation, you should take a moment to decide how important a comfortable retirement is to you. You might like to: Spend more time with your family and friends Start new hobbies or interests See more of the world Move abroad. Or you may just want to maintain the standard of living you have just before you retire. Are you sure you can achieve this? CONTINUED OVER WORKPLACE SAVINGS GUIDE 5

6 WHY START SAVING FOR RETIREMENT? (CONTINUED) THE BASIC STATE PENSION The Basic State Pension is available to those who have made the required amount of National Insurance contributions over the years. It s a basic pension paid by the Government on a regular basis from state pension age, which varies depending on when you were born. If you want to know your state pension age, go to The tables below show the current maximum figures for the tax year 2012/2013. Do you think these amounts could cover the lifestyle you d like in retirement? Single Weekly Monthly Yearly 5, Married Weekly Monthly Yearly 8, RISING COSTS There s no way of knowing how much things will cost in the future. The value of your money today can change over the years due to inflation. As a result, money today could be worth less in the future. What would 1,000 today be worth after a 10 year, 20 year and 25 year gap, based on an inflation rate of 2.5% a year? For more detailed information on the options available to you, please visit the Government s online site at Alternatively, you can call their helpline on to speak to an adviser. They can provide you with a pension forecast (known as a BR19) that will give you an idea of how much money to expect from the State. Today 1,000 After 10 years 781 After 20 years 610 After 25 years 539 By saving for a pension and increasing your contributions each year, you can counter the effects of inflation. This should help strengthen the value of your pension. WORKPLACE SAVINGS GUIDE 6

7 SO HOW DOES A COMPANY PENSION WORK? You can pay into your pension by making regular and/or single contributions. You will also receive tax relief on these contributions making your total payment larger. Depending on your scheme, your employer may also make monthly contributions on top of this. These payments will often form the greater part of your pension fund. It s often tempting to dip into your savings when you want something new. However, with your pension fund you can t get access until you reach age 55. This keeps your money safe for your future and also gives you the chance to make the most of its growth potential. When you reach retirement age (55 years and above) you can use your pension fund to buy an annuity. You purchase it from an insurance provider who will, in return, pay you a regular income for the rest of your life. You also have the option to take up to 25% as tax free cash and use the balance to provide your income. CONTINUED OVER WORKPLACE SAVINGS GUIDE MAKING THINGS SIMPLE 7

8 DON T BELIEVE THE MYTHS MAKING THINGS SIMPLE YOUR FUTURE DON T PANIC MAKING THINGS SIMPLE (CONTINUED). WHAT HAPPENS TO MY MONEY WHILE IT S IN THE PENSION FUND? A pension is an investment. Your pension fund is invested in one or more funds, which are managed by fund managers. A fund manager is an experienced investor, responsible for managing the investing strategy and trading activities of their fund s pot of money. With Legal & General, you re given a choice as to where you d like your money invested. Don t worry if you re not an experienced investor, however. We have guides and tools designed to help you understand investing and decide what type of funds are right for you. If you don t want to pick your own investments, your pension fund will be invested in a default fund or lifestyle profile. Default funds Lifestyle profiles A default fund is the fund, chosen by your employer, into which your pension contributions will be made automatically. It s to ensure your money is held in an appropriate fund if you don t specify an alternative. A lifestyle profile automatically changes the funds you are invested in, depending on the length of time until your selected retirement date. As you get closer to retirement, the funds you invest in will automatically be switched to structure your pension fund for your selected retirement date. Please remember the value of your pension fund(s) can go down as well as up and is not guaranteed. If you re unsure about where to invest, you should seek the advice of a financial adviser before making any decisions. WHAT HAPPENS TO MY MONEY IF I DIE BEFORE I RETIRE? If you re 18 or over when you die, then the way your benefits can be paid will depend on a number of things. You can set up a trust at any time to say how the lump sum should be paid. You can ask us to pay any lump sum death benefit to a person(s) you have nominated by completing a nomination form. Alternatively, it can be paid to your estate. Your estate is the sum of everything you own. This could include your home, your belongings, or any stocks and shares you own. If you do nothing, or you re under 18 years old and therefore unable to set up a trust or make a nomination, any lump sum will be paid to your surviving spouse/registered civil partner. If you do not leave a surviving spouse/registered civil partner, it will be paid to the residuary beneficiaries of your estate. If you re concerned about how your family would cope financially in the event of your death, you might want to think about making arrangements for your partner or any dependants to receive benefits. WORKPLACE SAVINGS GUIDE MAKING THINGS SIMPLE 8

9 WHAT ARE THE BENEFITS? Pensions are not just about locking money away for years until you reach retirement. There are many benefits and incentives for you to think about. For example, your company may make contributions. The taxman will make contributions. The Government will also provide tax breaks on your investments. YOUR EMPLOYER S CONTRIBUTIONS. Your employer may choose to make regular contributions to your pension in addition to your own personal contributions. These could help to increase your total pension fund without costing you anything. This helps you to save more and receive a better income at retirement. If you turn down the offer of a pension you may miss out on these contributions, effectively missing out on free money. The amount of money your employer contributes is often based on the amount you pay in. If you can, you should try to maximise your payments so you can take full advantage of this. CONTINUED OVER WORKPLACE SAVINGS GUIDE 9

10 (CONTINUED). TAX RELIEF. Basic rate tax relief (20% for the 2012/2013 tax year) is added to your personal contributions to your pension plan. Your personal contribution is called your net contribution. Once tax relief has been added, the total invested in to your plan is called the gross contribution. If the basic rate of tax changes, so will the amount you pay in. You can pay gross contributions of up to 100% of your annual earnings or 3,600 if this is more, to your pension plan each tax year and receive tax relief, (including higher rate tax relief where appropriate). If you are a higher rate taxpayer you ll need to claim any extra tax relief through your tax office. If the total contributions to all of your pension arrangements add up to more than the Annual Allowance, you ll have to pay a tax charge on the amount paid above the Annual Allowance. B A A B 80 Your total contribution 20 Taxman s contribution TAX FREE. Another major advantage of a pension is that your investment gains aren t taxable. Any growth in the value of the fund is free of UK income and Capital Gains taxes. Tax is deducted from UK company dividends paid into pension funds. We re not able to reclaim this tax. TAKING YOUR BENEFITS. You can take your benefits at any time from age 55. Please note, you don t have to stop working before taking your benefits. When you take your benefits you can either turn your entire fund into a pension income by buying an annuity, or you can take up to 25% of it as a cash lump sum and use the rest to provide a smaller pension income. Remember, the more you pay into your pension fund, the more your final retirement income, and cash lump sum if you choose, could be. The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future. WORKPLACE SAVINGS GUIDE 10

11 We understand that it s not easy to work out what you ll be doing in retirement and that you may not want to think about it. But with greater issues affecting our future, like our increasing lifetimes and the State Pension, we also realise how important it is to act sooner rather than later. DECISION MAKING. First it is important that you decide what you hope for and expect for your retirement: At what age would you like to stop working? What sort of retirement would you like to lead? Will your retirement income need to provide for any dependants? Having considered what you hope for when you retire, now you need to consider how you will achieve this: How will the Basic State Pension help towards this? How much money do you need to contribute and for how long? How much money can you afford to contribute? These can be difficult questions to answer but you need to be aware that what you do now will impact on your future. CONTINUED OVER WORKPLACE SAVINGS GUIDE YOUR FUTURE 11

12 DON T BELIEVE THE MYTHS MAKING THINGS SIMPLE YOUR FUTURE (CONTINUED). WHAT TO EXPECT. The following table gives an idea of the level of income that could come from a 200,000 pension fund at age 65. RETIRING AT AGE 65 WITH A PENSION FUND OF 200,000 YOUR FUTURE Full Pension 11,600 p.a. DON T PANIC Tax Free Cash 50,000 Reduced Pension 8,710 p.a. All firms use the same rates to show how funds may be converted into pension income. The rates used for converting the fund into pension, which may vary depending on actual date of birth, assume an interest rate in retirement of 2.9% a year (that used when the standard central growth rate of 7% p.a is used to project funds). This assumed interest rate is subject to review every year on 6 April using a method prescribed by the Financial Services Authority to reflect market changes. These figures are only examples and are not guaranteed they are not minimum or maximum amounts. You could get more or less than this. What you get back depends on how your investment grows and on the tax treatment of the investment. These figures are based on a male currently aged 45 who will retire at age 65, with a pension fund of 200,000. The pensions shown at age 65 would be payable at the beginning of each month throughout the lifetime of the pensioner, but guaranteed to be paid for a minimum of five years. We have not taken into account the effects of inflation. THE SOONER THE BETTER It s quite easy to put off thinking about retirement, as it can seem so far away. But the earlier you start adding to your pension the more time your fund has the potential to grow. Take a look at the following example. It shows the difference in contributions you d have to make if you started contributing in your 20s, 30s or 40s. The following example is based on three individuals starting to save for retirement aged 25, 35 and 45 who want to have an income of a minimum of 10,000 per year, in today s terms, from age 65. These figures are based on example charges of 1% a year, with an investment return of 7% a year to retirement. Contributions are shown gross of basic rate tax relief and increase each year by 2.5%. Inflation at 2.5% a year has been assumed. MARK IS 25 GEORGE IS 35 DANIEL IS 45 Monthly contributions Total yearly income at age 65, in today s terms 10,000 10,000 10,000 The same cost of delay impact would be shown had three females been shown. WORKPLACE SAVINGS GUIDE YOUR FUTURE 12

13 As one of the UK s leading pensions providers, we understand that planning for the future can be tricky. We also know that investments are confusing and difficult to get your head around. That s why we ve created some helpful tools and services to support you. WORKPLACE SAVINGS GUIDE DON T PANIC 13

14 DON T PANIC (CONTINUED). RETIREMENT PLANNER ATTITUDE TO RISK TOOL Why not use our retirement planner to calculate your earnings at retirement? This tool has two options. You can select a retirement income and calculate the contributions you might be required to make to achieve it. Alternatively, you could calculate the retirement income you might receive based on the contributions you choose to make. To help guide you through the investment process we ve developed the Attitude to Risk tool. It asks you a series of multiple choice questions and, based on your answers, works out your attitude to risk. It then gives you an account of what this might mean to you, how it relates to your pension and where you might want to invest your fund. You can also obtain a printed version of this tool by calling the employee helpline on MANAGE YOUR ACCOUNT (MYA) Manage Your Account allows you to manage your pension online. You can register for MYA and access your personal account at the Workplace Benefits website. You can access these tools to help you plan for your future via our Workplace Benefits website at For further information contact us on Call charges will vary. We may record and monitor calls. Similar to an online bank account, you can: View your personal details View details of all your pension plans and see exactly where your money is invested. Check your current fund value. Change your investment funds. Update your personal details. workplace savings guide DON T PANIC 14

15 Hopefully this guide has given you a good insight into the world of pensions. To help you make the right choice, please read your other documents carefully. They ll give you details on every aspect of your plan and should answer a lot of your questions. HELPING YOU DECIDE There are important decisions to make when it comes to retirement planning. If you ve read through your members pack and are still unsure of what you d like to do, speak to an independent financial adviser. WHAT HAPPENS NEXT? If you feel your company pension could benefit you and you d like to sign up, then let your employer know and they ll help guide you through the application stage. A LITTLE MORE INFORMATION Department for Work & Pensions The Pension Service (Part of DWP) The Financial Services Authority (FSA) Legal & General s Corporate Pensions Website Your employer has provided you with a great opportunity, but it s up to you to take it. We believe that with the right planning and advice, you could be enjoying the retirement you ve always wanted. By joining your company pension scheme today, you could start to make the most of your financial future. WORKPLACE SAVINGS GUIDE WANT TO FIND OUT MORE 15

16 Legal & General Assurance Society Limited Registered in England No Registered office: One Coleman Street, London EC2R 5AA We are authorised and regulated by the Financial Services Authority. We are members of the Association of British Insurers. Q /12 H132205