A pension is a form of investment or savings plan designed to provide you with an income to live on when you retire. There are many different types of pension arrangement available, from state pension schemes offering limited financial support for your old age to private pension plans giving you the freedom to build a larger fund for your retirement. Even if your initial contribution is small, whatever you can put aside in the early years will be vitally important to getting your pension growing to avoid a poor income in retirement.
Additional Voluntary Contributions (AVC)
As a member of an Occupational Pensions Scheme, Additional Voluntary Contributions payments can be made above the normal level of contribution to gain additional pension benefits.
Personal Pensions / Private Pensions
A personal pension is usually arranged by yourself, not your employer, and is a type of money purchase plan.
A personal or private pension is a tax-efficient savings plan that enables you to save for retirement. Your pension contributions attract tax relief (up to annual limits) and can be made in various ways, either regularly, by lump sum or a combination of both.
On retirement, up to 25% of your pension fund value can be taken as a tax-free cash lump sum.
Company Pension / Work Pensions / Pension Scheme
A Company Pension or (Work Pension) scheme is a pension that is set up by your employer to provide retirement benefits to you whilst you are employed by them. It allows you to accumulate a pension fund during your working life. You will usually be required to make regular pension contributions based on a percentage of your salary into the work pension scheme. It is customary for your company or employer to match the level of contribution you make. Over the next few years, most employees will be auto-enrolled into a pension scheme.
Final salary pension scheme
A Final Salary (or Defined Benefit) basis scheme is a type of occupational pension where the amount of retirement income is based on your final salary. These are becoming less common.
Money-Purchase Pension Plan
A Money Purchase pension plan or (Defined Contribution plan) is a pension scheme where the final benefits are not linked directly to your salary. You (and maybe your employer) pay regular contributions into your pension pot. Upon retirement, the total pool of capital in your pot can be used to take an income in retirement. The amount in each money purchase plan member's account will differ from one member to the next, depending on the level of contributions and investment return earned on such contributions.
Self Invested Personal Pension (SIPP)
A Self Invested Personal Pension (or SIPP) is a type of personal pension. A SIPP is a pension plan which gives you the freedom and control to totally manage your own investment decisions by buying stocks and shares and a range of other types of asset. Any contributions that you make to a SIPP will receive tax relief, up to certain limits.
A stakeholder pension works in a similar way to other personal pensions whereby you pay money into your pension to build your pension fund. However, they have to adhere to Government rules and minimum standards on annual management charges, access and terms to ensure they offer value for money, flexibility and security.
- You can switch to a different pension provider without the provider you leave charging you
- You can start contributions from as little as £20, and pay weekly, monthly or at less regular intervals
- You can stop, re-start or change your contributions whenever you want - there are no penalty fees
- The scheme must be run by trustees or by an authorised stakeholder manager, whose responsibility will be to make sure that the scheme meets the various legal requirements.
New State Pension
The New State Pension will be a regular payment from the government that you can claim if you reach State Pension age on or after 6 April 2016. To receive it you must have paid, or been credited with, sufficient National Insurance contributions.
You will be able to receive the new State Pension if you are:
- a man born on or after 6 April 1951
- a woman born on or after 6 April 1953
and meet other eligibility criteria.
The New State Pension increases every year by whichever is the highest:
- earnings - the average percentage growth in wages (in Great Britain)
- prices - the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
You can still get a State Pension if you have other income like a personal pension or a workplace pension.
Please bear in mind it is unlikely that state pension will provide an adequate income for your retirement in isolation.
State pension is a taxable pension income. You will pay tax on any pension income above your tax-free Personal Allowance. The rates of Income Tax you pay depend on how much of your taxable income is above your Personal Allowance in the tax year.
Unit Linked Pension
Pension contributions made to money purchase plans may be made into Unit Linked Pension Funds. Pension contributions are used to buy units in a pooled fund or funds. Unit-linked pensions are invested in a variety of funds. The funds are grouped together in sectors, representing the style, area and risk level in which the relevant pension fund has chosen to invest. As the value of the units may fall and rise during the period of investment, care is taken to 'spread' the investment in a variety of ways to obtain the best return commensurate with prudent investing.
Unitised with profits pension
Pension contributions made to money purchase plans may be made into Unitised with profits funds. With profits pension schemes payments are used to buy units in an insurance company's with profits fund. The value of these increases annually depending on the investment performance and profits of the insurance company.
A PENSION IS A LONG TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND ON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.
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