Pensions Explained

A pension is a form of investment or savings plan designed to provide you with an income and/or capital to live on when you retire. There are many different types of pension arrangement available, from state pension schemes offering limited financial support for your old age to private pension plans giving you the freedom to build a larger fund for your retirement. Even if your initial contribution is small, whatever you can put aside in the early years will be vitally important to getting your pension growing to help avoid a lower income in retirement.

Personal Pensions

These are pensions that are arranged by yourself, not your employer. Your pension contributions attract tax relief (up to annual limits) and can be made in various ways, either regularly, by lump sum or a combination of both. On retirement, up to 25% of your pension fund value can be taken as a tax-free cash lump sum. Whilst it is invested your pension grows tax free and does not form part of your estate for Inheritance Tax (IHT) purposes. There are a number of different types as shown below:

Personal Pension Plan

A Personal Pension Plan is a type of money purchase plan (also known as a defined contribution plan), which generally allows you the ability to invest in a range of collective investment funds offered by the pension provider.

Self-Invested Personal Pension Plan (SIPP)

A SIPP is a type of personal pension, which gives you a much wider range of investment choices than a personal pension such as allowing you to hold direct shares or commercial property alongside collective investment funds from the leading fund managers marketplace.

Stakeholder Pensions

Stakeholder pensions were introduced at a time when you paid higher charges on personal pension plans. They have to adhere to government rules and offer minimum standards on annual management charges, access and terms to ensure they offer value for money, flexibility and security.

Employer Pension Schemes

There are a number of different types of pension schemes that can be offered by your employer, and your employer must offer you access and auto enrol you into a scheme and where applicable make contributions or offer certain benefits if you meet the eligibility criteria. The main types employer pension schemes are outlined below:

Group Money Purchase (Defined Contribution) Schemes

These can be also referred to as Group Personal Pension schemes or Auto enrolment (Workplace) schemes and these are a pension that is set up by your employer to provide retirement benefits to you whilst you are employed by them. It allows you to accumulate a pension fund during your working life. You will usually be required to make regular pension contributions based on a percentage of your salary into the the pension scheme. and your employer will also pay into this arrangement. Employers must automatically enrol certain employees into this pension scheme and are obliged to make a certain level of contributions if you meet the eligibility criteria.

Final Salary Pension Scheme

A Final Salary (or Defined Benefit) basis scheme is a type of occupational pension offered by selected employers where the amount of retirement income is based on your final salary. These are becoming less common. As a member of an Occupational Pensions Scheme, Additional Voluntary Contributions payments can be made above the normal level of contribution to gain additional pension benefits.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

State Pensions

New State Pension

The New State Pension will be a regular payment from the government that you can claim if you reach State Pension age on or after 6 April 2016. To receive it you must have paid, or been credited with, sufficient National Insurance contributions.

You will be able to receive the new State Pension if you are:

  • a man born on or after 6 April 1951
  • a woman born on or after 6 April 1953

and meet other eligibility criteria.

The New State Pension currently increases every year by whichever is the highest:

  • Earnings – the average percentage growth in wages (in Great Britain)
  • prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
  • 2.5%

You can still get a State Pension if you have other income like a personal pension or a workplace pension.

Please bear in mind it is unlikely that the State Pension on it’s own will provide an adequate income for your retirement.

Tax position – pensions

The state pension is a taxable pension income therefore it will use up your personal income tax allowance first before other income and if it exceeds your available personal income tax allowance, the excess amount may be taxable at your marginal rate of tax. You will also pay tax on any pension income derived from your employers or private pension arrangements above your available tax-free personal income tax allowance. The rates of Income Tax you pay depend on how much of your taxable income is above your Personal Allowance in the tax year.

If you would like to arrange an initial meeting with one of our financial advisers to discuss your pension arrangements or retirement planning need, please contact the SMH Financial Services team on info@smh.group or 0114 266 4432.