What is a pension?

A pension is simply a form of saving for retirement. The money you save during your working life builds up in a pot that can be converted into a guaranteed income (annuity) or a single or series of cash lump sums when you retire. You can take the first 25% of your pot tax free with the remainder being taxed as income.

Pensions come with tax benefits, both when you put money in and when you come to take it out at retirement. When you save in a pension the taxman helps to increase your pension pot by providing tax relief – meaning that money you would have paid as income tax will go into your pension pot instead. If you are a basic rate tax payer that's an extra 20% added. If you are a higher or additional rate tax payer you'll be able to claim the difference as well.

Pensions come with tax benefits, both when you put money in and when you come to take it out at retirement.

Because pensions grow largely free of tax, a pension could be a tax efficient way to grow the money you set aside for your retirement. This could help to boost the amount you have in your fund. Like most investments, the value of your fund can go down as well as up and you may not get back what you put in.

There are three main categories of pension: State Pensions; workplace and individual pensions.

State Pensions

The State Pension is a regular payment that you should receive from the government when you reach State Pension age.  The age that you receive this payment, and the amount, does vary depending on when you were born and the amount of National Insurance contributions you've paid (or deem to have paid).

A new single tier flat-rate has been introduced by the government which you can claim if you reach State Pension age on or after 6 April 2016. This will apply to men born on after 6 April 1951, and for women born on or after 6 April 1953.  If you draw your State Pension after 6th April 2016 you may also be entitled to claim under the previous State Pension. You can find out more on the new State Pension on www.gov.uk/new-state-pension.

Workplace pensions

Workplace pension schemes are set up by an employer or organisation for its employees and are managed by trustees. 

To help people save more for their retirement, employers are required to automatically enrol employees onto workplace pension schemes if they’re not already in one which meets certain standards.

If you are in a workplace pension you'll normally be required to pay a minimum amount to the scheme. Your employer will top this up which will boost your pension pot.

Individual pensions

This is your own private pension that you keep, regardless of your employment status. So even if you are working, not working or you are self-employed, you could still contribute to a pension.

There are different types of individual pensions including:

Personal Pensions: If you don't have access to a workplace pension scheme, you can contribute to a personal scheme and choose from a range of funds to invest in. You can also have a personal pension even if you are in a workplace pension or other occupational scheme.

Stakeholder Pensions: This provides access to an individual pension but with limited charges and fund selection.  You can invest monthly or annually.

Self-Invested Personal Pensions (SIPPs): SIPPs can have higher charges but are designed to provide you with a wider choice of investments from which to invest in.

Individual pensions are available from a number of different providers.

This is based on our understanding of current taxation, legislation and HM Revenue & Customs practice, all of which is liable to change without notice. The impact of taxation (and any tax relief) depends on individual circumstances.

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