Pensions allow you to save money whilst you work so that you are able to fund your retirement. Your pension may be part of a workplace scheme, or you may create private pension for yourself which involves putting aside the money yourself, independent of workplace schemes. There are many different types of pensions and the one you opt for is usually dependent upon what your workplace has to offer. Here we will debunk some of the mystery surrounding pension-types.
Defined Benefit Pension Scheme
A defined benefit scheme (or final salary) operates on the premise that your employer will fund your retirement by an amount in keeping with your length of service. Every year an employer will pay a certain amount into their employee retirement fund, and when a person retires, they will pay out the correct amount to them. This scheme is ‘defined’ in that a set income is promised to you, and as such you will receive that amount when you stop working. This type of pension is becoming less frequent nowadays.
Defined Contribution Pension Scheme
Unlike with a Defined Benefit Scheme, a Defined Contribution Scheme includes no promised pay-outs. Rather, you invest through pay-check deductions or a percentage of your salary in order to build up savings for your retirement. A benefit of this is that usually you can decide how much you want to pay in, and your employer will match some or all of those contributions. The money is invested into stocks and bonds, and you can keep an eye on how much it is then generating for your pension (there is the risk of it falling in value, as with any investment of this kind). It is usually possible for you to change where these contributions are invested depending on your risk appetite should you wish to do so.
Group Personal Pensions
A GPP is a type of Defined Contribution Pension Scheme, whereby you contribute to a pension fund with a provider of your employer’s choice, who then offers you tax relief on your payments. Again, the risk of this process is that stock values may fall and thus your pension amount will fluctuate with them. This contract is sponsored by your employer, but the contract is strictly between yourself and the pension provider.
This pension type is independent of your employer, and is a private contract between you and your pension provider or insurance company. Choosing a personal pension can be difficult. The Citizens Advice service is a great place to start if you are stuck for how to shop around for a pension that suits you.
When you reach your State Pension age in the UK, you become eligible for a contributory state pension. As long as you have a National Insurance number (NI) in the UK and 30 years or more of National Insurance contributions or credits, you can receive a weekly payment of the basic State Pension. The amount currently sits at £122.30 per week. If you are on benefits or tax credits, you cannot simultaneously receive extra State Pension. You can calculate your state pension age here.
It is possible to delay your State Pension when you are 4 months away from your State Pension age if you do not want it yet, which could in turn increase the payments that are made to you when you should wish to claim it (although these extra payments are not necessarily tax-free). If you do not actively claim your State Pension, it will be automatically delayed until you do decide to claim it.
How Do I Calculate My Pension?
Forecasting your pension based on all the variables discussed (how much you can contribute to the ‘pot’; other sources of income; workplace contributions; NI credits, etc.) can be a daunting task. Utilize free resources such as this one by the Money Advice Service in order to have your likely pension calculated for you, hassle free.
Why Should I Opt-In to a Pension Scheme?
Other than the obvious benefit of financial stability throughout your retirement period, a major selling-point of having a pension is the tax-relief on offer. Around 20% of tax will be taken on the funds you invest into your pension if paid by yourself or have it taken from your payslip and given to you as a further contribution to your pension pot. Workplace pension schemes instead offer such tax relief on your payslips, so you are exempt from paying 20% tax.
Thinking about pensions, particularly if retirement is far out of mind, can be somewhat baffling. It pays to be on-the-ball from the outset of your career, though. Get your employer to give you detailed information of the pension scheme they provide rather than opting-in or out mindlessly. When orchestrated correctly, investing in a pension is essentially investing in yourself. If you are smart in your earlier years, you will be thoroughly thanking yourself later.
If you are looking for a Uncle Buck short term loan, we typically require our customers to be in employment with a net income of at least £600 to cover the cost of their monthly repayments. If you are currently receiving a pension and would like to apply for a loan, please contact our customer service team for more information.