UK pensions without the jargon!

How many people understand their UK pensions? From state pension to defined benefit schemes, from annuities to discount rates, Brits are forever trying to understand technical words and confusing jargon! This is probably one of the reasons why 35% of all Brits don't have any form of retirement plan! Nobody wants to work into their 70's or even 80's so why not start today by at least learning the basics.

What is a pension?

According to the oxford dictionary a pension is, "a regular income paid by a government or a financial organisation to someone who no longer works, usually because of their age or health." In simple terms a pension is a long-term investment, which is tax efficient, and allows you to build up a pot of money so that you have the choice to stop working at some point in the future. For me personally I would like to spend that time sipping a Pinna Colada in the sun. The harsh reality is grandparents in their 60’s and 70’s are still working full time jobs, wondering where the next rent cheque is coming from!

What is a state pension?

Most people that have worked in the UK and made national insurance contributions for a minimum of 10 years will be entitled to at least a part of the state pension. In order to be eligible for the full amount ￡168.60 per week (￡8,767.20 p/a) you need 35 years fully paid national insurance contributions. Don't worry if you don't have the full entitlement, you will receive your pension pro rata dependent on the amount of years you have built up. For example, if you have 17.5 years paid you would be entitled to half the state pension, ￡84.30 per week (￡4,383.60 p/a). On top of this if you have any gaps in your national insurance record, which is the case for a lot of my clients living internationally, you can back-date up to 6 years contributions that you may have missed.

What is a private pension?

A private pension is any plan that isn't set up or administered through the state. These plans typically involve you paying a monthly amount into a scheme, which is then invested until your chosen retirement date. These payments typically receive tax relief on the way in and are often matched by contributions from your employer.

What is a defined contribution pension?

A defined contribution pension is the most common pension held in the UK. It can be set up by yourself or by your employer, your contributions are typically placed in investments in accordance with your tolerance to risk. The total amount of your pension pot will be determined by investment performance, as the value can go down as well as up. When you retire you can decide how and when (after the age of 55) you access your money. At age 55 you can take 25% of your pension pot as a tax-free lump sum, the remaining income will be taxed at your marginal rate.

What is a defined benefit pension?

A defined benefit pension scheme is essentially a promise from your employer to pay you a certain income at a pre specified retirement date. The income you receive is based on the amount of years you have been a member of the scheme, and the earnings you have received from your employer whilst working for the company. These schemes are often referred to as "final salary" schemes, as many are based on the final salary you received when employed by the company. You may also be entitled to a tax-free lump sum payment, but you may have to give up some of your pension income to pay for it. 

Should I bother with a pension?

In short, the answer is of course you should! No matter how old you are, it's always going to be beneficial to save, even more so if your employer is willing to contribute. Whatever way you look at it, pensions are simply a tax efficient way to save for retirement. If you're unsure of how to set up a pension, which pension is right for you, or whether your current pension is fit for purpose, that's when you need to seek expert advice. If you have any questions regarding this article, or anything relating to pensions feel free to reach out via LinkedIn or the email below.

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