Increased media coverage and government schemes have placed pensions at the forefront of our minds — but do you know your options? Personal pension provider True Potential’s Tackling The Savings Gap Q3 2016 report found that 57% of over 55s didn’t know how they would access their savings. We have created the following guide to help you better understand your options:

How much will you need in retirement?

The amount you’ll need in retirement depends on numerous factors, including the quality of life you want to have. However, to live comfortably, True Potential estimates that you’ll need £23,000 a year in retirement. This is almost four times the £6,000 Brits are on course to receive each year.

In general, a pension pot will likely need to sustain you for 20 to 30 years, so it’s important that you put aside a substantial amount. When deciding how much you’ll need, remember that your outgoings will likely be significantly less in retirement, as your mortgage could be paid off, children will have left home and you won’t be commuting into work each day.

You’ll also need to factor in your State Pension, as this can be used to top-up your pension pot. The State Pension rate is £7,582 per year as of April 2016, which works out at £151 per week. Remember that you’ll need to reach State Pension age before you can access these funds — this age is currently 65 for men and between 60 and 65 for women, although it is expected to rise in the coming years.

By saving earlier, you’ll have a greater chance of gathering a larger pension, so it’s worth some thought even if retirement seems a long way off.

What types of pensions are available?

Choose a pension based on your individual needs. The following types are available:

Personal pension

A personal pension is used to set aside money each month, which is invested to grow the fund over time. You have complete control over where and how it is invested.

The amount you can invest is capped at £40,000 per year, although this is dependent on your earnings. Once you reach 55, you’ll be able to access your funds. This can be used to purchase an annuity—a regular monthly income until you die — or take a regular income using Drawdown.

You can also access 25% of your total pot tax-free as either a lump sum or smaller withdrawals.

Auto-enrolment

Auto-enrolment is a type of workplace pension that is organised through your employer, whereby you, your employer and the government contribute to your pension pot. At present, the minimum you can contribute is 2% of your earnings, whereby you put in 0.8%, 1% comes from your employer and 0.2% from tax relief.

The minimum contributions are set to increase in April 2018 to 5% (2.4% from you, 2% from your employer and 0.6% as tax relief), then again in April 2019 to 8% (4% from you, 3% from your employer and 1% as tax relief).

To qualify, you’ll need to meet the following requirements:

  • Be over 22
  • Be under the State Pension age
  • Not currently in a scheme
  • Earn over £8,105 a year

Defined contribution pensions

Defined contribution pensions can be paid into by an employer, employee or both and, as such, are a type of both personal and workplace pension. Because the amount you pay in is invested, the amount payable in retirement is dependent on how much is contributed and the investment’s performance.

Defined benefit pensions

In contrast, defined benefit pensions are always workplace pensions. The amount you contribute depends on numerous factors, including your salary, how long you’ve worked for your employer and the pension scheme’s rules. This type of pension guarantees a set pension pot once you retire.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Tax rules can change at any time.