A pension is a retirement savings plan that provides a regular income stream to individuals when they retire. There are 3 main pension types which are explained below:
Defined Contribution- this is where a defined amount of money is contributed towards your ‘pension pot’. The money you and you employer add to this pot is invested through a pension firm, you can access this pot from age 55 or let it grow further.
Defined Benefit/Salary scheme- This is where you get a set percentage of your average salary for each year you work for a company.
State Pension- Everyone in the UK is entitled to a state pension as long as they keep building up their national insurance years through working. To qualify for the full state pension you need to work in the Uk for 35 years, the full current amount is £230.25 per week. Currently you can access this pension from the age of 66.
More key information about pensions:
Tax relief- pension contributions are made before tax is taken off. So if you are normally charged 20% tax and you contribute 100 pound a month then actually only 80 pound is taken off your pay packet.
Employer contributions- employers must legally contribute towards your pension too if your opted into the companies pension scheme. For example with the minimum contribution of 8% employers must pay 3% of that. Along with yhe tax relief this creates a further boost to your pension pot.
Salary Sacrifice- This is another option where an employee agrees for a salary reduction in exchange for the firm putting that amount into their pension pot. This results in both parties saving on National Insurance Contributions, some companies even place this benefit into the pension pot.
25% Tax free cash option- At the age of 55 you can take one or more tac=x free lump sums out of your pension pot even if your still working or paying into the pension pot.
How can I calculate my pension:
Use these calculators to help you work out what your contributions will result in-
https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/pension-calculator
https://www.moneysavingexpert.com/savings/discount-pensions
Support:
You can get free advice from Money Helper if you are under 55 and if you are 55+ Pension Wise offer free guidance and support. You can find out more information about your pension options including consolidating your pension, annuity vs drawdown arrangements, personal pensions and more here:
https://www.moneysavingexpert.com/savings/discount-pensions
https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics
