Essential Guide To Pension Schemes

Are you financially ready for retirement? As a UK resident, there are three traditional routes to obtain a pension entitlement: the state pension, workplace pensions and private pensions you set up yourself. This article gives an overview of these types of pensions and the considerations of each.

Private versus State Pensions

When it comes to pensions, the first distinction is made between state and private pensions. The UK state pension is a regular payment from the government, the amount of which depends on an individual’s National Insurance Record.

Alternatively, a private pension scheme can refer to either an occupational arrangement or a stand-alone scheme. Depending on personal circumstances, there are several types of  pension to choose from. These include…

Defined Benefit / Final Salary Pension

These are workplace pensions arranged by employers. How much the scheme will pay out on retirement depends on that plan’s rules. Your salary and the time you worked for an employer influence the outcome. For most schemes, the earliest age at which a member can take benefits is 55.

Defined Contribution / Money Purchase Scheme

With defined contribution pension schemes, the money you pay into the scheme is placed into a fund and invested on your behalf. As a consequence, the value of your pension can go up or down. The amount you receive in retirement will be determined by how much you have contributed and how the investments have performed.

Self Invested Personal Pensions

A Self Invested Personal Pension (SIPP) is essentially a do-it-yourself pension which allows you to retain complete control over where your savings are invested. SIPPs enable you to consolidate all of your pensions into one pot, giving you more options to diversify you investments.

With a SIPP you can invest into a much wider choice of assets, including Stocks and Shares, Investment Funds, Bonds and even Property.

Small Self-Administered Scheme

SSAS (Small Self-Administered Scheme) pensions are occupational  pension schemes usually set up by business owners and often include their family as members of the scheme. HMRC SSAS rules allow members to invest in a range of assets including commercial and residential property. The scheme can also borrow money, via a mortgage for example, for investment purposes.

SSAS pensions are commonly used by small business owners, providing company directors not only with tax planning opportunities, increased retirement benefits and greater investment choice but also flexible finance for their business in the way of loans to their business.

Stakeholder pensions are another type of personal pension. In some cases, employers may offer them under group arrangements, but individuals can easily set up their own. Benefits include relatively low minimum contributions that are often flexible. Charges are capped, and a default investment strategy will suit those who prefer not to get involved in the investment.

Contributions are subject to tax relief, which is automatically handled by the provider for basic rate taxpayers. Higher rate taxpayers need to claim the additional relief through their tax return.

Pensions are long-term investments, and it pays to research the options thoroughly and speak to a pensions specialist before committing to a plan. Understanding the risks and investment choices involved is also key.