Our simple guide to pensions is here to help you understand the jargon
A pension is the savings you make to support yourself in later life. You may have received a pension from your current employer or previous employers and you can also set one up yourself to get saving. There are three different types of pension, and you can have more than one kind should you wish to.
The state pension is essentially a regular payment people can claim when they reach the state pension age. How much you get depends upon your National Insurance contributions, with the government determining your pension payments through the credits you’ve accrued over life.
A workplace pension is organised through an employer. Thanks to auto-enrolment legislation it’s now compulsory for employers to set up a pension scheme for eligible staff, either through their own scheme, a specialist pension provider or through a government-backed scheme. An employer must put in a minimum contribution to a workplace pension, as must an employee. The government also contributes to your pension in the form of tax relief. You choose how much to pay into your pension and your pension provider claims tax relief from the government and adds it to your pension.
A personal pension is a defined contribution pension (see below), this means the amount you receive at retirement depends on how much you’ve paid into the pot and how well your investments have performed. You decide how much to pay into your personal pension and your pension provider claims tax relief and adds it to your pot.
These are the three types of pension you’ll come across as a saver, but it’s worth noting that pensions can also differ in terms of whether they’re defined benefit or defined contribution. Here’s a brief explanation of what these terms mean.
Defined benefit pensions (sometimes known as final salary pension schemes), promise to pay a retirement income based on a percentage of your salary. How much you receive depends on how long you spent working for your employer, and how much you were earning at the time you gave up work. Nowadays you will find these pensions are rare.
Defined contribution schemes are a type of pension which you and sometimes an employer pay contributions into each month. Typically, these contributions are invested in shares or bonds, and the final size of the pension pot depends on how well these perform over time. After the age of 55, you can use a defined contribution pot to buy an annuity, which will then pay you an income for the rest of your life, or you can simply take out your money as you wish (subject to tax).
6 reasons to review your pension
Regular reviews of your pensions with an FCA regulated pension advisor are important to ensure the best outcome at retirement.
A lifetime annuity provides you with a regular retirement income for life – with the guarantee that the money won’t run out before you die. Other lifetime annuities include investment linked or flexible annuities – which have an income based on the investments chosen. They carry more risk than basic lifetime annuities in return for a potentially higher income. It’s important you choose the type and features best suited to your personal circumstances, your life expectancy and your attitude to risk. Meeting with a financial adviser will help you shop and select the best annuity for your circumstances and help ensure you get the best return from your pension.
I have lost my pension details
Most pension schemes of which you’ve been a member must send you a statement each year. These statements include an estimate of the retirement income that the pension pot might generate when you reach retirement. If you’re no longer receiving these statements – perhaps because of changes of address – then to track down the pension there are three bodies you can contact:
The pension provider
The Pension Tracing service
Your former employer if it was a workplace pension
Independent or Restricted Advisers?
Financial advisers who provide pension and retirement advice fall into two categories, either independent or restricted. Independent financial advisers (IFA's) are not limited to the types of products or providers they can recommend. Restricted financial advisers can be limited in the number of products or providers they are able to offer. The best option would be to select an adviser who offers "whole of market service" as this gives you the full choice of products and services and help ensure you find the right one for you.
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