Free money, where do I sign up? This is not a trick, this is about your pension.
I’m a money nerd so I like talking about pensions but everyone should know, up to £1,000,000+ is available for free in your workplace or private pension.
In the UK it is a legal requirement for employers to pay into worker’s pension pots. A pension is a pot of money that will grow through time, the money is invested in the stock market etc, and earns interest. When a person gets to retirement age this money pays an income for the rest of their life.
How much pension I will get depends on how much money is put in, and when. The money comes from me, employers, HMRC and growth in the stock market. It is not easy to tell exactly how much there will be, but I can take an educated guess.
Where Does The Free Money Come From?
Good question! It comes from 4 places:
- My employer adds a minimum of 3% of my salary*
- HMRC adds 20% on any amount I add (or 40% for higher rate tax payers)
- My pot of money grows in the stock / bond markets
- Pension funds grow tax-free
*As long I am over 22 and earning over £10,000 a year my employer legally has to add a minimum of 3%, many employers add more and at a younger age which is fantastic. The higher the amount the more free cash and growth.
Great, But Where Can I Get My Free £1,000,000?
Ok, straight to business, I like your thinking. Lets take below example of me earning £10,000 a year.
Salary is important for these calculations because it determines how much the employer adds.
If I work from age 22 until 65 and my pension fund earns 5% compound interest. My employer adds 3% and HMRC will add 20% of anything I add.
Saving £50 a month will grow to £148,000, free money =£122,000
Saving £100 a month will grow to £256,000, free money =£204,000
Saving £150 a month will grow to £361,000, free money =£284,000
Saving £200 a month will grow to £467,000, free money =£364,000
Saving £300 a month will grow to £678,000, free money =£524,000
Saving £600 a month will grow to £1,313,000, free money =£1,003,000
Yes, yes I know £600 a month is not realistic, I just wanted to see what it would take to get to millionaire status! You have to admit the smaller amounts are manageable and they add up to something special.
I should aim to add as much as possible, for as long as possible to earn the largest amount of money for our pension. Starting at age 40 will get you a hell of a lot less than if you start at 20 or 30.
How Much Free Money Can You Get From Your Pension Scheme?
This depends on a range of factors like:
*How much salary you earn
*How much extra you contribute
*How much your employer adds
*How long you invest
*How much the stock / bond market returns
*What age you start and stop
* What fees your provider charges
*When you start withdrawing
*Government policy / laws
There are some things in the above list we have no control over but we can decide how much we add and when. The free money from the employer, HMRC and growth outweighs some alternatives for savings. Nowhere else in life will legally get you this much free cash.
Pensions can be a gold mine, especially if you have a good provider, high employer contribution and pay in more yourself.
What if I don’t want to work until I’m 65?
I’m glad you asked, you might not have to. Take the example of me working from age 20 to 40, then leaving my job. I add £250 a month for these 20 years then stop.
My employer adds 3% and HMRC will add 20% of anything I add, this will stop when I leave the job. My salary is £10,000 a year.
Over 20 years I add £60,000 (£250 a month), my fund grows over this time. I leave work aged 40 and don’t add any more money for the next 25 years.
My pension fund is still invested and earning interest so I will end up with £467,000 in the pot.
£467,000= £60,000 my contribution + £407,000 Employer, growth & HMRC
How Can I Get Free Money If You Don’t Have A Workplace Pension
You might be thinking I’m self-employed / don’t have access to an employer pension, what about me?
Don’t despair, there is still free money available from a SIPP.
A SIPP is a Self-Invested Personal Pension, they can also be invested long-term in stock / bonds, HMRC will still add 20% or more. This is available to anyone in the UK to be accessed after age 57. Children can have junior SIPPs.
Lets use another example. Assuming 5% growth and if I add £200 a month to my SIPP from age 20 to 57, then HMRC adds 20%. I will end up with £309,000 in my pension pot.
£309,000 = £103,000 my contribution + £206,000 HMRC & growth
What Should I Do Next? I Want Free Money
Another great question, if you’re employed check out what your workplace offers, you might be surprised on the percentage. Some employers add more if you do too, if so sign up to as much as you can afford.
If you are not employed or self-employed use a SIPP and have HMRC match. Read up on how pension funds work & are invested as well as the fees / charges of your provider. You really can’t afford to not know this stuff, you’ve seen just how much money is available.
It is more important to get started as early as possible, in your 20s ideally, this gives your fund lots of time to grow. Alternatively start when you can, as the saying goes the best time to start was 10 years ago, but second best time is today. £50 a month can grow to something decent over time.
Ask around with people you know, there is a lot of information and groups online too. The more we talk about these things the quicker we can get our money in order and go back to what is important in life. If you are having debt problems it is best to get them straightened out, the quicker you do that the easier your financial life will get.
Thanks for reading, I hope you get some value from EatSaveLive.
If you like this blog please leave a comment, recommend to people you know or share on social media. I love to help people with their finances and would love to hear from you.
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