If you are in your twenties, then ‘Pension’ is not a word you will frequently hear. But you will start hearing more of it as you approach your thirties and get into your forties.
Pensions, Annuities, Retirement Saving Plans and Tax Benefits! All this information can be overwhelming to the newbie.
Well, here’s the low-down on it.
A pension is a type of long-term investment plan which allows you to save money for your retirement years. But why do you need a pension? It is a tax-efficient form of savings when compared to others, and the money that you save accumulates into a pot called the ‘Pension Pot’.
When it comes to pensions, you now have more options than ever. You can either opt for a fixed income or a flexible taxed income or take out a part or whole of it as a cash lump sum.
Up to 25% of the pension pot can be taken as a tax-free cash payment.
You can sell the remainder of the pot to an insurance company in exchange for a regular fixed income that you will receive until your death. This is called an Annuity.
There are three different types of Pension schemes – your employer may run some, and others can be set up by you. And the best part is that you can invest in multiple pension schemes at the same time or even invest in ISAs or other tax saving plans.
The State Pension is a payment that the government will make to you on the basis of your National Insurance Record once you attain payable age.
The current eligibility age is:
65 for men born before 6th Dec 1953
Between 60 and 65 for Women born after 5 April 1950 but before 6 December 1953
Due to the Pensions Act 2008, the state pension age for men and women will increase in the future.
To be eligible for State Pension, you must have a minimum of 10 qualifying years where you make National Insurance (NI) contributions or are deemed to have paid it.
The basic state pension in the tax-year 2015-2016 is £115.95 a week. The amount you receive may differ depending on individual circumstances.
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Company pension schemes are set up by employers for its employees. The scheme is set up under a trust and is completely managed by trustees.
Employees can choose to join a company pension scheme and make contributions towards it every year. In addition, employers also contribute towards your pension scheme selected.
There are two types of company pension schemes.
· Final Salary Scheme: The final salary scheme is also known as defined benefit pension. It is dependent on your final salary and the number of years you have enrolled in the pension scheme.
· Money Purchase Scheme: Money Purchase Scheme is also known as a defined contribution pension scheme. Typically, you and your employer may make contributions into your pension pot. The amount you contribute, returns on the investments made with the pension funds and any charges deducted when you access the pension, will determine the pension that you receive when you retire.
Each one of these schemes has their own perks to offer, and your choice should depend on your immediate and long-term financial goals.
Many financial services companies offer Individual Pension schemes which you can keep by yourself. It is not connected in any manner to your employment status.
There are multiple choices again.
Personal Pensions: This is an ideal choice for self-employed people or for those who do not have a company pension scheme. It can be taken with you even if you switch employers.
Stakeholder Pensions: Similar to personal pensions, stakeholder pensions are ideal if you are self-employed or can save only small sums of money at this point in time. Some of the benefits of stakeholder pensions are limited charges and penalty-free transfers to other pension plans.
Self-Invested Pensions: A self-invested pension scheme provides you greater control over your investments. It is usually chosen by people who have a fair amount of financial acumen and like to make their own investment decisions.
If you still have questions in mind, you may look at our Complete Pensions FAQ.