Understanding workplace pensions

If you joined the armed forces at a young age, you probably weren’t thinking much about pensions on day one – and that’s completely understandable. You may have been more focused on training, postings and building your career, not on what life might look like decades from now.

If you joined from overseas, you may have come in with a very clear plan about your future. Whether that was about your career, your family or where you eventually wanted to settle. A workplace pension can be a really useful part of that longer-term plan, even if it didn’t feel urgent when you first joined.

When it comes to saving for anything, the most important ingredient is time, and the longer you can let your pot of money grow, the bigger it’ll get.

No matter how small the boost you can give your pension pot, your best friend is time. This is the power of compound growth and this is such an important concept when it comes to money.

It’s important to start thinking about your pension as early as possible, preferably as soon as you start working or in your 20s. This is because even small contributions made early can grow significantly over several decades.

While you’re serving, you build up pension benefits through the Armed Forces Pension Scheme.

In AFPS 05 and AFPS 15, pension benefits usually start building from the first day of paid service. Under AFPS 75, pension benefits started building from age 18 for non-commissioned personnel and age 21 for commissioned officers. This means some people who are still serving may have pension built up under both sets of rules, depending on when they joined.

To be eligible to receive pension benefits from the Armed Forces Pension Scheme, you need to have completed at least two years of service. You can find out more about the Armed Forces Pension Scheme in our dedicated video on it.

It’s also useful to understand how civilian workplace pensions work more broadly. You may have built up a pension before joining. You may build one after you leave, and some service personnel – such as reservists and veterans – may have both a military and a civilian workplace pension at the same time.

Spouses and partners are not enrolled into the Armed Forces Pension Scheme, so understanding workplace pensions is also important for them and your household overall. For civilian workplace pensions, the size of your pension pot when you retire will depend on a number of factors. Here are four to consider:

Number 1: How long you save for.

Starting early gives you more freedom to adjust your strategy if life circumstances change. The sooner you plan, the more control you have over your future financial security. Small sacrifices over a long period of time are far easier to deal with than suddenly having to make big sacrifices in later life.

Even if you’ve left thinking about your pension until later in life, there still may be time to benefit from compounding too. That’s because the money invested in a growing pension is free of any taxes while you’re building it, plus you’ll receive valuable tax relief on the contributions made, boosting your overall savings.

Number 2: The size of your pension pot at retirement will also depend on how much you pay into your pension along the journey of your working life.

Through employment, you pay National Insurance contributions which count towards your State Pension. You’re also likely to be paying into a workplace pension. Even small additional monthly contributions to your workplace pension can add up to significant sums over the long term.

If your employer offers contributions or offers to match your additional contributions, this is a valuable benefit worth considering. Turning down your employer’s contributions is like turning down free money.

Often the offer from your workplace will be something like ‘we (your employer) will pay in 5% if you (the employee) pay in 3%’. What this means is that in return for sacrificing 3% of your wages, you get a top up of 5% from your employer plus tax relief on your own contribution from the government.

Let’s look at a practical example of how £36 could become £120 when you pay into your pension. Say you earn £1500 a month before tax, then 3% of your salary is £45 a month. If you were taxed on that at the basic rate of 20% and received it as salary it would be £36 in your pocket.armed forces

Because of tax relief, if you pay this into your pension, the full amount of £45 will be added to your pot, plus your employer contribution, which for this example would be an extra £75. This means by giving up £36 a month, you are effectively putting £120 into your pension pot each month.

If you opted out of making the pension contribution, you might keep your £36, but get none of that boost from your employer or the government, or the benefit of it growing over time.

Number 3: The size of your pension pot is affected by the underlying investments that your money is put into.

All pensions are held with a pensions provider who will invest your money on your behalf.

How these investments do, their ‘performance’ affects the size of your pension pot too.

It’s likely that your pension money goes into a mixture of investments, to spread risk. This might include the stock market, considered relatively high risk, but also some lower risk investments too, such as bonds.

The single most important thing is to pay in as much as you can regularly, but once you’re doing that, it’s worth looking at the underlying investments. Depending on your provider, you may have some choice over how the pension is invested and how much investment risk you can take.

The longer you have before retirement, the more stock market risk you can consider taking, because you have the time to ride out any ups and downs in market conditions.

Number 4: fees and charges

Now in most cases, your employer will choose the provider for your workplace pension, but once you leave your job you are usually free to move your pension pots to different providers. You should look at how much you are paying in fees and charges because these also compound up over the years, meaning they can eat into your growth too.

Choosing a pension with lower fees could boost your pension pot size over time. Ultimately, having a workplace pension is an efficient way to top up your retirement income.

Most modern workplace pensions are what’s known as defined contribution schemes. You can learn more about this in our video called ‘Types of Workplace Pensions’. If a person has paid into a defined contribution workplace or personal pension, they can only access the money at age 55, increasing to 57 from April 2028. That means money put into a pension has to be money that you can afford to lock away.

Pensions might feel far off, but every little bit you put in now is a gift to your future self. If you think of your employer’s contribution as free money, then it makes sense to take advantage of it. Even small amounts matter, and the earlier you start, the better.

Once you’ve started saving, it’s worth taking a closer look to find out where it is invested and if there are any additional fees. Compare providers to check for lower fees or better service. Having a pension helps you feel more confident about your financial future.

In the next video, we’ll look specifically at Armed Forces Pension Schemes, so you can understand how your military pension works.