A Guide To Pensions And The Various Schemes Available
A pension is money you save throughout your working life so you have an income for your retirement. We often, mistakenly, think of a pension as something for old people, but the sooner you start saving the better.
There are various types of pension available and they can be tricky to understand – look at our overview.
Pension Schemes Overview
Defined Contribution Pensions
Overview: Your pension pot is based on how much is paid in.
With a defined contribution pension, you build up a pension pot with the regular contributions you (and your employer if applicable) make.
The money is invested in stocks and shares and any investment returns and tax relief are also added to the pot. When you reach retirement age (from 55) you can take your pension pot as a lump sum, a regular taxable income or a combination of the two.
Overview: A pension scheme arranged by your employer.
You contribute towards a workplace pension every time you get paid. A percentage of your salary is put into the scheme before you pay tax on it. Your employer may also make contributions, and will have to if you’re eligible for automatic enrolment.
Overview: A defined contribution pension, arranged by yourself rather than your employer.
These were originally introduced for people whose employers did not offer a workplace pension scheme, however you can have both a personal and a workplace pension scheme.
You choose the pension provider yourself and make the contributions to build up your pension pot. Any investment returns and tax relief are added.
Group Personal Pension
Overview: A group of personal pensions chosen by your employer
A group personal pension scheme is like a personal pension but, instead of selecting the pension provider yourself, it is chosen by your employer. Your arrangement is still just between you and the pension provider.
Self-Invested Personal Pensions
Overview: You choose how to invest your retirement savings
With self-invested personal pensions (SIPPs) you will be able to choose which funds to invest your money in and have greater control and flexibility over your pension. You are responsible for the decisions affecting your pension pot.
Overview: A flexible defined contribution personal pension
Stakeholder pensions adhere to a set of conditions defined by the Government to make them accessible to the self-employed, unemployed and low earners. They have low minimum contributions, capped charges and an optional default investment strategy (so you won’t have to choose your own funds to invest in)
Overview: The pension you get from the Government
Most people will be entitled to State Pension. It is based on your National Insurance contributions made throughout your working life. The amount you will get depends how much you’ve paid in National Insurance. You will be able to claim when you reach State Pension Age.
Defined Benefit Pensions
Overview: Based on your salary and length of service.
This is usually a workplace pension scheme arranged and contributed to by your employer. How much you get will depend on your salary, age and how long you’ve worked for your employer. Your pension provider will pay you a certain amount, usually increasing year-on-year, when you reach normal retirement age (usually 65).
Additional Voluntary Contributions (AVCs)
Overview: Top-up your workplace pension
AVCs are extra payments made into your workplace pension scheme to build an additional pot, which sits alongside your main workplace pension. You can use it to top-up your retirement savings.
Free-Standing Additional Voluntary Contributions (FSAVCs)
Overview: Boost your pension
FSAVCs are similar to AVCs but, instead of being arranged by your employer, you set it up directly with a pension provider yourself.
Pensions And Tax Relief
One of the biggest bonuses of pensions is the tax relief. This comes in two stages:
- Tax relief on contributions
- Tax relief when you draw your pension
The Government want to encourage people to save for retirement – it does this by giving tax relief on your pension contributions. How much relief you get depends on the rate of income tax you pay. For basic-rate taxpayers, the tax relief is 20%.
When you pay in, the government does too.
Let’s say you want to put £100 into your pension: you will only pay £80 and the Government will put in the other £20 (the amount it would have taxed you on £100 of your salary).
When it’s time to take your pension, you can currently take up to 25% as a tax-free lump sum and the rest as a regular taxable income.
- Build up savings so you can have a comfortable lifestyle when you retire
- You could take one lump sum, several smaller lump sums or a regular income from your pension later
- Tax relief
- Employer contributions
- Choice of different types of scheme to suit your needs
- You won’t have access to your money until you’re at least 55
- Pension investments can go up or down – you could lose money if funds perform badly
- Affordability – on a tight budget, it can be difficult to put away ANY amount
Have I left it too late to start saving?
No. Better late than never.
What is automatic enrolment?
All employers must now automatically enrol eligible employees onto a workplace pension scheme.
Can I pay into more than one pension scheme?
Yes. Since 2006 there has been no limit on the amount of different pension schemes you can belong to, however there is a limit the total you can contribute each year.