Pensions explained

We are here to help you understand the different types of pensions.

Pensions explained

Pensions offer generous tax reliefs as an incentive for us to save for our retirement. You can pay money into a pension and receive tax relief up to the value of your earnings, capped at £40,000 per tax year. For example for every £8,000 you contribute to your SIPP, the government pays in £2,000 and if you are a higher rate tax payer you can claim further tax relief through your tax return.

Types of pensions

There are many types of pensions and most of us end up with more than one over our working life. Here are some of the different types of pensions you can use to achieve your retirement goals:

State pension

This is provided by the government and is based on your National Insurance contributions. It is paid to you once you reach State Pension age. You can get a forecast of your state pension online https://www.gov.uk/check-state-pension or by calling 0345 3000 168

Personal pension

This is a money purchase pension that can give you more freedom about how you invest the money than you might have in a company scheme. Your employer does not necessarily contribute to a personal pension although it can do so. A SIPP is a personal pension where you choose the investments and are in control of managing them.

Occupational pension

This is pension scheme which is established by an employer for its employees. There are many different types:

Final salary (defined benefit) scheme Career average pension Money purchase (defined contribution) scheme Stakeholder pension Automatic enrolment scheme
The amount you receive at retirement is determined by the final salary you received from your employer and the length of service. This is similar to a final salary scheme but the amount received is based on an average of your salary across your career with the company. The income at retirement depends on the amount of money generated by contributions, tax relief and investment returns. These were introduced in 2001 and are designed to be low cost money purchase schemes. This is a money purchase scheme set up to encourage employees to save in a pension. Both you and your employer make contributions

To maximise your retirement savings, you might want to contribute to more than one pension. Many people have several as they have worked for different companies during their working life. It is important to keep track of your pensions, understand what you have, how it’s invested and whether it’s performing well.  You may also want to consider consolidating your pensions into a SIPP.

Benefits of a SIPP

  • Full control over your pension savings  - you choose what to invest in
  • Wide range of investments including shares, funds, ETFs and investment trusts
  • Flexibility in accessing your pension when you reach age 55
  • Easy to manage your pension with 24 hours a day access and less paperwork
  • Ability to consolidate smaller pensions into a SIPP

Is a SIPP right for me?

SIPPs are not suitable for everyone. SIPPs are a type of pension suitable for investors who are comfortable making their own investment decisions and are willing to regularly review their portfolio to ensure the investments remain in line with their pension objectives. If you don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you.  You can find out more about SIPPs here.

How do I track down lost pensions?

If you have changed jobs you may have lost track of old pension schemes -you can use the Government’s pension tracing service to help track lost pensions or call 0345 6002 537.

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