Pension - What is a pension
A pension is a fund that you pay into during your years of employment to support yourself in later life.
Debitoor accounting and invoicing software helps freelancers and small businesses keep track of company finances. Try Debitoor for free for 7 days.
Pensions can be organised in different ways. You may receive a pension from the state, your employer (or previous employers), or you may have independently bought into a pension scheme so that you have savings for retirement.
The different types of pension
In the UK, there are three different types of pensions. These are State Pensions, workplace pensions, and personal pensions.
1. State Pension
The State Pension is a regular payment people can get from the government when they reach the State Pension age. The amount of pension you’ll receive depends upon how much you’ve paid in National Insurance Contributions. Anybody can claim a State Pension, provided that they have a minimum number of qualifying years of contributions.
2. Workplace pension
A workplace pension, also known as an ‘occupational’, ‘works’, ‘company’ or ‘work-based’ pension, is a pension that’s organised through an employer. With a workplace pension, a percentage of your pay is deducted automatically and paid into the pension scheme every payday. Normally, your employer also adds money into the scheme for you.
With a workplace pension, it may also be possible to receive tax relief from the government.
3. Personal pension
Personal pensions, also known as ‘private pensions’, are individual funds that you save for your retirement. The value of the pension when you retire will depend on how much you’ve paid into it and how well your investments perform.
When you first start a private pension, you’re usually given a choice of pension funds. These are managed by professional money managers who will invest your payments in a range of assets. Once your pension plan is open, you can start to make regular contributions and additional one-off payments. Your pension provider will also claim tax relief from the government and add this money to your pension plan.
Personal pensions normally have a set age when you can start taking money from them. Once you reach that age, it’s possible to take up to 25% of the money in your pension pot as a lump sum, tax-free. After this withdrawal, you’ll then have 6 months to start taking the remaining amount which you’ll usually have to pay tax on.
There are different options available when you take your pension. You may choose to take all (or some) of it as cash. You may decide to buy a product that provides you with a guaranteed income for life. Alternatively, you can choose to invest it. This would allow you to get a regular, adjustable income in your retirement.
It’s important to remember that not all pension providers offer the same options. It’s therefore advisable to investigate the different possibilities before deciding on your personal pension scheme. However, if the options they offer are no longer appealing, it is possible to transfer your pension pot to another provider.