Get in the know about Pensions
Your essential guide
A pension is, quite simply, a tax-efficient long-term savings plan to provide an income in your retirement. But there are so many types of pension – and so many recent reforms and rule changes – that the market has become a minefield. And if yours is performing poorly now, it cost you thousands when you come to retire.
At in the Know, we believe pensions should be easier to understand. That’s why we offer a simple, no-commitment review to give you the facts you need to make the right decision. Here, we’ll start by covering the basics.
What types of pension are there?
The State Pension:
Most people will qualify for a state pension, which is paid by the government and a secure income for life. How much you receive is based on the amount of National Insurance contributions you’ve made during your working life.
Defined benefit pensions:
If you worked in the public sector or for a large company you might have one of these. They’re salary-related (either final salary or career average), and pay out a secure income for life.
Defined contribution pensions:
Also known as money purchase schemes, these build up a pension pot from which you draw your retirement income. The amount that builds up will depend on the charges you pay, how well your investment performs and how much you or your employer pay in.
A SSAS (Small Self Administered Scheme)
The Pension of choice for many business owners, due to its tax efficient and cascading of wealth options that are not available through any other type of pension. A SSAS is usually set up by the owner(s) of a business to benefit and can include members of their immediate family.Many SSAS pension holders take advantage of the fact that you can purchase commercial property via this unique type of pension, including their trading premises which can be leased back to the business – with no tax due on the income generated. Click to find out more and request a pension health check.
Other terms you may come across
Within the three pension classes above, there are certain other types. Here are a few.
Private Pensions – another name for any pension to which employers make no contributions.
Group Personal Pensions – employee schemes where each member has a personal pension plan with a provider chosen by their employer who can also decide on restrictions and other details.
Self-employed Pensions – a private or personal plan taken out by a sole trader or self-employed worker.
SERPS Pensions – the State Earnings Related Pension, an additional element of the State Pension, which was abolished in 2016 with the introduction of the flat rate State Pension.
Personal Pensions – a contract between the pension member and an insurance company or pension provider.
Self-Invested Personal Pensions (SIPPs) – a personal pension offering the member a wider choice of investments, including commercial property and single company shares, and greater flexibility in retirement.
Stakeholder Pensions – these are a form of Defined Contribution personal pension. They have low and flexible minimum contributions, capped charges and a default fund option. Some employers also offer them.
FSAVC Pensions – a private pension linked to an employer’s Defined Benefit Scheme but separate from its Additional Voluntary Contribution arrangement (AVC). Now largely defunct.
Money Purchase Pensions – another name for Defined Contribution Pensions.
Why age matters
Your age, life stage and career progress all have a big effect on your pension decisions.
Under 45 – the earlier you plan for your retirement the better, even if it seems a long way off. Depending on where you work you may have pension arrangements already in place, so now’s the time to review them and make sure they’re working hard so the benefits are amplified for when you come to retire. The longer you have to build up your pension pot, if advised as suitable you could make your investments more adventurous too – which could potentially add greater returns to your pension funds.
45 to 55 – here’s where you start to think about semi- or full retirement, and what you might need your pension income to cover, what sort of lifestyle you’d like and when you can afford to retire. If it’s some years since you started your pension your attitude to risk may have changed, so as retirement gets closer you might look for greater security. And if your career’s taken in a few different employers, you may have several pension funds – so it’s important to make sure they’re all working as hard as possible, and not being drained by high charges and hidden fees.
55 years and over – retirement is literally around the corner now, so you’ll want to make sure of a few things: ensuring you’ll be debt-free and avoiding last-minute stock market slumps by having a policy giving solid returns can both mean the difference between a basic or comfortable retirement. Changes in your personal circumstances might also affect which option’s right for you – so it’s important to review your existing pensions and know what other options might work better for you before you start drawing your pension and potentially get locked into a poor or average performing arrangement.