Pension need-to-know’s

What is a pension?

Think about a pension like a long-term savings account; its purpose, to provide you with an income in retirement, whether it be from 55 years of age or your selected retirement age. 

What types of pensions are there?

Workplace Pension

Many people think the state pension is not enough to live off in retirement, therefore they use a workplace pension to top up what they already have. Under the Pensions Act of 2008, once you earn over £10,000 per year and are over 22 years of age, you will be automatically enrolled into your works pension scheme. Your contributions will be taken from your monthly salary, and your employer will also contribute to your pension pot each month. 

State Pension

A state pension is a type of pension you can receive from the government once you’ve reached the state pension age, which is currently 66. The current state pension is £185.15 per week. This figure rises in line with inflation, so if you are retiring in the future, you are more likely to receive a higher figure.

The amount you receive from your state pension will depend on how many years you have worked, along with the number of qualifying years of national insurance contributions, which is somewhere between 10-35 years. 

Personal Pensions

Personal or private pensions are something you can arrange. These are usually favored by self-employed workers or those who wish to save more than their workplace or state pension. With these pensions, you benefit from tax relief on your contributions. The money you pay in will be invested into a carefully selected range of investment funds and can rise and fall in line with the economic market. 

You can also allocate beneficiaries to your plan, so should the worst happen, your pension pot would be paid to those you have named. 

What happens when you retire? 

Once you reach the age of 55, you can take 25% of your pension as a tax-free lump sum, with the rest providing an income for as long as you have funds in your pension pot. 

You can take as much of your pension pot as you like, as often as you like. However, withdrawals above the tax-free 25% will be taxed at your marginal rate.

The government announced in September 2020 that they were planning to raise the earliest age you could access your pension from the age of 55 to 57 in 2028, so this may affect how you plan for your retirement.

If you are interested in starting your pension journey or would just like to have a chat to see what options are available to you with your current pension provisions, please give us a call to book in with our Independent Financial Adviser, Geraint Davies on 01633 987070.