Pensions
Pension Advice
How Pensions Work
If you are employed you may be offered membership of your employer’s workplace pension scheme. It is likely that you will need to pay contributions and these will be deducted from your salary and paid into the scheme by your employer. Your employer is likely to contribute to the scheme too, to add to your savings. The contributions are invested until you retire.
You may be covered by the automatic enrollment rules, which started in October 2012. The earliest you can open your pension pot is usually age 55 (it is our current understanding that this will increase to 57 in 2028), unless you are retiring because you are suffering from ill health or if your pension scheme allows for retirement before age 55. You will be able to take some as a cash lump sum, and the rest in the form of a pension.
If you are self-employed, you can set up a pension yourself with a provider. Providers include insurance companies, banks, building societies, and some high street shops. You can also set up a pension yourself as well as or instead of being in your workplace pension scheme.
Saving for your retirement through a pension scheme has certain advantages over saving in other ways, including:
- tax relief on your contributions;
- investment growth which is free of tax; and
- the ability to take some of your benefits at retirement as a cash lump sum.
When you take your pension, it will be taxed in the same way as your salary – that is under the pay as you earn system.
You cannot take out the money you put into your pension arrangement and use it for another purpose, because the purpose of the scheme is to give you an income in retirement. It can only be transferred to another pension scheme, or used to provide your benefits at retirement or death.
Pension Advice
Types Of Pension
Personal Pension
A personal pension plan is a pension you set up yourself, to give yourself a retirement income. It is a type of defined contribution scheme.
You can have a personal pension and use it to save for your retirement, even if you are already saving for a retirement income elsewhere, for example in your employer’s workplace pension scheme. Your contributions count towards the total amount you can receive tax relief on each year. This amount is limited to either 100% of your earnings or the annual allowance, whichever is lower.
The amount of pension you will be able to take from your personal pension depends on the following:
- the amount of money you pay into your pot;
- the charges taken to pay for the cost of investing and administering your pot
- Watch your savings grow, based on your chosen investments; and
- how you choose to use the money when you retire.
You can normally retire at any age after 55, subject to any restrictions your provider might apply.
Self Invested Personal Pensions
A self invested personal pension is a type of personal pension. Like a personal pension, you set it up yourself, to give yourself a retirement income.
The main difference is that you have a wider choice of how you invest your pension pot if you use a self invested personal pension. You can decide your own investment strategy, or can appoint a fund manager or stockbroker to manage your investments.
You can start a self invested pension from scratch, or you can transfer funds from another pension scheme. You don’t need a substantial fund to invest in your self-invested pension plan, but the larger the fund the greater the range of investment opportunities you are likely to have.
Workplace Pension Schemes
Most employers give you the opportunity to join a workplace pension scheme. By 2018 all employers will have to do this. There are different types of workplace schemes available, and each works in a different way.
Some schemes may provide benefits at retirement, based on your service and earnings. These are called defined benefit schemes. Examples of defined benefit schemes are final salary and career averaged revalued earnings schemes (CARE schemes).
Defined contribution schemes provide benefits at retirement, based on how much is paid in, and how the chosen investments perform. Examples of defined contribution schemes are money purchase, group personal pension plans, group stakeholder pension schemes and group self invested personal pensions.
Self Invested Personal Pensions
A self invested personal pension is a type of personal pension. Like a personal pension, you set it up yourself, to give yourself a retirement income.
The main difference is that you have a wider choice of how you invest your pension pot if you use a self invested personal pension. You can decide your own investment strategy, or can appoint a fund manager or stockbroker to manage your investments.
You can start a self invested pension from scratch, or you can transfer funds from another pension scheme. You don’t need a substantial fund to invest in your self-invested pension plan, but the larger the fund the greater the range of investment opportunities you are likely to have.
Group Personal Pension
Group personal pensions are a type of personal pension, which your employer may run to give you and your colleagues a retirement income.
Although the group personal pension is arranged by your employer, the pension contract is between you and the pension provider. The pension provider is usually an insurance company. Your employer may also pay contributions to your pension pot.
You may find that the provider of the group personal pension charges less than it would for an individual personal pension plan. This is because the total amount of contributions the provider receives is likely to be more as your colleagues and your employer will also be contributing.
The amount of pension you will be able to take from your group personal pension plan when you open your pot depends on the following:
- the amount of money you pay into your pot;
- the charges taken to pay for the cost of investing and administering your pot;
- the amount of money, if any, your employer pays into your pot;
- how much your savings grow, based on your chosen investments; and how you choose to use the money when you retire.
You can normally retire at any age after 55, subject to any restrictions your provider or scheme might apply.
Transfering Your Pension
If you choose to stop paying into your pension before you take your benefits or open your pot, your pension still belongs to you. One of the options you may have is to take your deferred pension or retirement pot and put it into your new workplace scheme or into a personal or stakeholder pension.
You do not have to decide to transfer at the time you stop paying. You have the right to take a transfer until you are one year from the scheme’s normal retirement date or your selected retirement age.
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