A pension is a tax-efficient way of saving for your retirement. And there are different types available depending on your circumstances.
The earlier in life you start thinking about where your money is going to come from when you stop working, the greater chance you’ll have of doing all the things you want.
Here’s a quick overview of your pension options.
This is a pension scheme that’s arranged by your employer. If you’re between 22 and State Pension age, work in the UK and earn more than £10,000 a year, your employer must enrol you in a scheme. A percentage of your pay goes into the pension scheme each payday and your employer adds money to the scheme for you too.
There are 2 types of workplace pension:
- Defined contribution – a pension that’s based on how much money has been paid into it. The money paid into the scheme is invested by the pension provider. The amount available to you at retirement depends on how much has been paid in and how well the investments have performed
- Defined benefit – sometimes referred to as final salary pensions. The money you get back doesn’t depend on investments, but is based on your salary when you retire and how long you’ve worked for that employer
Personal pensions, stakeholder pensions and self-invested personal pensions (SIPPs) all count as individual pensions.
How regularly you pay in is usually up to you, and what you get back largely depends on how well your investments perform. The value of your pension can go down as well as up, and you may get back less than what has been paid in.
Other people like your partner or employer may also be able to contribute to your individual pension.
The new State Pension is a regular payment from the government. To get a State Pension, you must first reach State Pension age, usually with at least 10 qualifying years on your National Insurance record. The amount you receive is based on your National Insurance contributions.
While the State Pension probably won’t be enough to support you on its own, it can be a useful addition to your retirement income.
Why pay into a pension?
- You get tax relief on contributions. The government usually adds money to your pension in the form of tax relief. That means the government adds £20 to your pension for every £80 you pay in. If you’re a higher rate taxpayer, you may have to claim any higher rate tax relief you are entitled to through your self-assessment returns.
- Employer contributions. Now auto-enrolment has been implemented, all employers must contribute to pension schemes on behalf of employees. Check with your employer to see how much they’ll put in.
How to pay into a pension
- For individual and workplace pensions, you can make regular and one-off payments. This will vary depending on both your provider and the type of pension you have, so check in advance that you can pay in the way you want to.
- You can usually make payments through your employer too. Either contributions will come out of your salary, or your employer will pay into your pension themselves. Speak to your employer to see what they offer
When you can take money from your pension
Most pensions will set an age from which you can start taking money from your pension. This is usually somewhere between 55 and 65, so it’s worth finding this out from your pension provider.
They will also have rules for when you can take your pension earlier than normal, for example if you become seriously ill or unable to work.
How you can receive money from your pension
When the time comes to start taking money from your pension, you’ll need to decide how you want to do this.
If you’ve got an individual pension or a defined contribution pension, you can take up to 25% of its value as a tax-free lump sum. You’ll usually pay tax on the rest, which you can either take as cash, use it to buy a guaranteed income for the rest of your life, or invest it.
With a defined benefits pension, you may be able to take some of its value as a tax-free lump sum, but this will depend on the rules of your scheme. The rest of the money will be paid to you as a guaranteed income for the rest of your life.
It’s never too early to prepare for retirement
The earlier you start thinking about what kind of retirement you want and where your money is going to come from, the more control you can have over that period of your life.