Types of Pension, Pension Benefits, Pension Transfer Advice
Pension pots grow through the years as more money is invested in them, as interest is paid on the sum, or as stocks, shares and other investments grow in value. Most people in the UK can also receive a State Pension when they’re older, which grows according to how many years a person has paid National Insurance (NI) contributions.
Laws require all employers to enrol their workers on a workplace pension scheme if they’re aged between 22 and State Pension age, work in the UK, and earn more than £10,000 each year. Also, tax relief is paid on pension contributions, meaning that each contribution is topped up by the government.
There are a number of different types of pension that you can invest in
The longer you have a pension set up and pay into it, the more money you’ll have when you retire. This is because the investments in your pension are designed to grow in value over the long term.
Defined benefit pensions
Depending on the agreement with the company, if you have a defined benefit pension and retire, you’ll receive a portion of your final salary annually until you die. This amount is worked out depending on how many years you worked at the company.
So, for instance, if your employer pledged to pay one sixtieth of your final salary for each year you worked there, and you had 20 years of service, when you retired, you’d be paid a third of your final salary each year until you died.
Defined contribution pensions
This money is then invested by the operators of the scheme in things like bonds, stocks and shares, with the returns from these investments being added to the pension amount over time.
The State Pension
You may be entitled to the Additional State Pension depending on your National Insurance contributions. There’s no set amount, but the money you receive will depend on the benefits you claimed and how much you earned whilst working.
The new State Pension is for those reaching pension age on or after April 6th 2016. The amount paid again depends on the number of years that you contributed to NI, but the maximum is 35 years’ worth. If you have less than ten years of contributions, you won’t be eligible.
The Additional State Pension is not available if you reached State Pension age on or after 6 April 2016. In effect, the New State Pension is a combination of the State Pension and Additional State Pension.
Both varieties of State Pension increase per year in line with either UK earnings growth, prices growth, or an interest rate of 2.5% – whichever is highest. This is called the triple lock.
When you retire - Pensions Advice
When you retire, you can do a number of things with your pension pots. You can firstly take a 25% portion of the money out tax-free, with the rest being left to grow – known as drawdown. You can then take money out of this pot to fund your lifestyle, or use it to buy an annuity (a regular income) – this money is taxed according to your overall income.
Alternatively, you can invest the whole amount in an annuity, with the first 25% of each payment being tax-free, or keep the whole amount invested, with each withdrawal being tax-free at 25%.
Pensions can take a little time to get your head around, but after you do so, you’ll have a far better understanding of your finances during retirement, allowing you to do the things you want to do once you stop working. We offer no-obligation pensioms advice including advice about transferring your pension. Call us now for a no-charge initial consultation.