Learn more about pensions

To help you understand some of the most common types of pension, we’ve put together the basics and some useful links to get you started.

What is a pension?

Think of it like this – a pension is a type of long-term financial savings product where you can save up a pot of money, which is invested in a fund and used later in life for your retirement. There are different types of pensions, and although this can seem complex, there are two main categories which most fall in to:

A defined contribution pension is a type of scheme where you build up a pension pot which you can draw an income from when you reduce your hours or stop working. You must be aged at least 55 before you can start to take money out, and this is planned to rise to age 57 from 2028. With this type of pension scheme there is usually the option of taking a tax-free amount as a lump sum, or as part of regular withdrawals.

The amount that builds up depends on the level of charges you pay, how well your investment performs, and how much you and your employer (if you are employed) pay into the scheme.

Some familiar types of personal pensions that you might have heard of include workplace pensions, personal pensions and stakeholder pension schemes.

A self-invested personal pension (SIPP) is a type of personal pension and works in a similar way to a standard personal pension. The main difference is that with a SIPP, you have more flexibility with the investments you can choose. These are typically used to invest in commercial property, stocks & shares held directly and government securities.

A defined benefit pension is a salary-related pension which pays out a secure income for life and increases each year. The pension you get is based on how long you’ve been a part of the scheme and how much you earn.

You might have a final salary scheme where your pension is based on your pay when you retire or leave the scheme, or alternatively a career-average scheme where your pension is based on the average of your pay while you were a member of the scheme.

Workplace pensions

A workplace pension or employed pension is where you are automatically enrolled into a pension scheme and your employer chooses the pension provider, however, you will have an individual contract within the pension scheme. You can choose to opt out of the scheme but every 3 years you will be opted back in. Both you and your employer contribute to your pension and there are minimum contribution levels which will apply. These are currently 3% of your gross earnings from your employer together with a 5% minimum contribution deducted from your salary i.e. 8% in total. Most people are not aware that they can contribute more than the minimum amount up to the annual limits.

Your pension provider will claim tax relief at the basic rate and add it to your pension pot. If you’re a higher rate taxpayer you’ll need to claim the additional rebate through your tax return. You also choose where you want your contributions to be invested from a range of funds offered by your pension provider however, often, many people tend to simply select the default fund option offered by the scheme. Some schemes offer a salary sacrifice arrangement where you give up part of your salary and, in return, your employer gives you a non-cash benefit such as increased pension contributions or childcare vouchers. Once you accept a salary sacrifice arrangement, your overall pay is lower, so you pay less tax and National Insurance as a result.

What if you are self-employed?

With a self-employed pension you don’t get automatically enrolled into a workplace pension or have extra contributions paid into your pension by an employer. Most self-employed people use a personal pension for their pension savings. However, in our experience there is a significant number of self-employed people either not contributing enough, or not contributing at all, to a pension. As a result saving for retirement can be tougher when you are self-employed especially if you don’t have regular income. There are however, currently significant potential tax benefits to making pension contributions.

With a personal pension you choose where you want your contributions to be invested from a range of funds offered by the provider. The pension provider will claim tax relief at the basic rate of tax on your behalf and add it to your pension savings. How much you get back depends on how much is paid in, how well your pension savings perform, and the level of charges you pay.

The State Pension

The State Pension provides a secure base-level of income for life providing you have the qualifying national insurance record. Most people in the UK are able to claim a State Pension. To be eligible for the full State Pension you will need 35 qualifying years on your National Insurance (NI) record. You’ll usually need at least 10 qualifying years on your NI record to qualify for any State Pension at all.

You can still qualify for a State Pension if you have other income from a personal pension or a workplace pension based on your national insurance contribution record.

If you’ve reached State Pension age and you’re on a low income, you may also qualify for Pension Credit, even if you’ve saved money for retirement.

How Much is The State Pension?

Provided you have the qualifying national insurance record, most people in the UK are able to claim a State Pension. To be eligible for the full State Pension you will need 35 qualifying years on your National Insurance (NI) record. You’ll usually need at least 10 qualifying years on your NI record to qualify for any State Pension at all.

The full new State Pension is currently https://www.gov.uk/new-state-pension.

The only reasons the amount can be higher are if:

  • you have over a certain amount of Additional State Pension
  • you defer (delay) taking your State Pension

Get Your State Pension Forecast

You can get a State Pension forecast to find out how much you could get and when.

Get your pension forecast

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