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Pensions Explained

To afford the lifestyle you want when you retire, you need to do something about it today - the buts stop here. It may be tempting to say, "But retirement is a long way off", yet it's never too early to start investing in order to protect your future. To find out more, read our 'Pensions Guide' section by clicking 'Open Guide'. Once you have read that, why not view our 'What is a Pension?' video, presented by Lisa, our online guide.

Pensions guide

Our easy overview introduces you to the basics of pensions, provides information on the products available and gives you helpful hints on things to consider.

Company pensions

There are two types of occupational pensions

Defined benefit or salary related scheme

If you are in a defined benefit or salary related scheme, such as a final salary scheme, you're promised a certain amount at retirement. The amount you get is based on a number of things. These could include your earnings and how long you have been a member of the pension scheme. You can only join these schemes if your employer provides one – you cannot pay into one privately. The scheme's trustees and manager make all the investment decisions for you.

Salary related schemes are most common in the public sector for example teachers, nurses and local government employees usually benefit from these schemes. Some private sector employers also provide salary related schemes but recently many have closed due to the high cost of the guaranteed benefits. These schemes provide a defined amount of pension that is independent of market performance and usually adjusted for inflation. They also provide tax-free lump sums that are related to your salary and the number of years in the scheme.

Workplace pensions

You are in a workplace defined contribution scheme if you join your employer's trust-based money purchase scheme or a group personal pension arrangement (such as a group stakeholder scheme).

  • You make regular payments during your working life.
  • Your payments are then invested in your choice of one or more of a range of professionally managed funds and remain invested until you retire.
  • The investment performance of the fund(s) will determine how much money you may have available when you are ready to retire. Charges and investment performance will affect the fund value. The value of your pension fund can go down as well as up and may be worth less than has been paid in.
  • The money built up is used to buy an annuity or another product which provides you with an income in your retirement. Your pension income will be taxed as earned income.
  • You can usually take up to 25% of your pension fund as a tax-free lump sum, which means you will receive a smaller pension income.

Usually, your employer also pays into the scheme. If you can join your employer's scheme it's usually a good idea to do so, particularly if the employer pays towards your pension fund – some schemes are very generous. You can still take out a personal pension if you need to top up your pension fund.

Unfortunately, no one can know how much your fund will be worth when you retire or how much income you will receive each month. Although saving in a bank has its advantages (you have access to the money, you will at least get back the amount you paid in and any interest, once earned, is guaranteed), it is generally accepted that investing in a pension is a more effective way of planning for yourretirement. Pension plans are tax efficient so you can benefit from basic rate tax relief on your payments. This means that currently, for every £80 you pay in, the government will add a further £20 to your pension fund. And, if you pay income tax at more than the basic rate, you may be able to reclaim further tax relief when you complete your tax return (which does not get added to your pension fund).. A pension scheme lets you invest in a range of funds, so your money has a chance to achieve better growth than it would in a savings account. Your pension fund will grow free of UK income and capital gains tax. Some investment returns are received by the fund with tax credits, or after tax deductions, which cannot be reclaimed e.g. dividends from UK shares. . You need to understand more about the funds to make the best choices about where to invest your pension payments. You should also talk to a financial adviser.

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Pension Tracker via MyAviva

Pension Tracker is an exciting way for you to take control of your Aviva pension plan. It's an online service that helps you manage your pension arrangements any time that suits you, much as you can with internet banking.

Let us help you sort out your finances

Again if your response is, "But I don't really understand how to plan my finances better", we're here to help. It's all about getting the information you need to make the right decisions. Our tools and calculators can help you get to grips with your finances and plan for the future.

Pension calculator
See whether you're on track to fund the retirement you want.

What Next?

Now you've learnt more about pensions, you can compare the features of Aviva's pension plans, or apply for your chosen option:

Stakeholder Pension

You can start a Stakeholder Pension plan with as little as £20.

It's a tax-efficient way of investing for your retirement, but bear in mind that you won't have access to the money in your pension fund until you retire.

Find out more about stakeholder pensions

Personal Pension

You can make regular or one-off payments into a Personal Pension plan and stop, restart and change your payments to suit yourself.

It's a tax-efficient way of investing for your retirement, but bear in mind that you won't have access to the money in your pension fund until you retire.

How to apply for a Personal pension

WC03077 07/2014