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 an income or a single or series of cash lump sums when you retire. You can also take 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 you pay less tax, and that money goes into your pension pot instead. 

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; company 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 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. You can find out more on the new State Pension on www.gov.uk/new-state-pension.

Company pensions

Company pension schemes are set up by an employer or organisation for its employees under a trust, and are managed by trustees. 

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

If you have a company pension, employers often makes contributions to your pension too. This increases the amount being saved into your fund and could really help 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 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 company scheme, you can contribute to a personal scheme and choose from a range of funds to invest in.

Stakeholder Pensions: This provides access to an individual pension but with limited charges and you can invest smaller lump sums.

Self-Invested Personal Pensions (SIPPs): SIPPs can have higher charges but are designed to provide you with a wider choice of funds 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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