A pension is a savings plan to give you an income when you retire. It’s crucial to understand the three different types of defined contribution (DC) pensions:
There are different types of both workplace and private pensions. In the UK, most people of ‘State Pension Age’ and older are entitled to a regular pension payment through the State Pension. Some people are able to supplement this with a private or workplace pension. Workplace pensions have become much more common in recent years, as employers are now required by law to ‘auto enrol’ most employees into a workplace pension, unless these employees choose not to be part of it, or to “opt out” as we call it.
Together, the amounts of money received through these different pensions are designed to bring security and stability as you step into retirement.
The State Pension is paid as a consistent income that comes into payment when you reach the State Pension age. The State Pension age is currently 67, but will be higher for future generations and may change further, so do check yours before making plans for your future. Not everyone is entitled to a full State Pension payment, this is dependent upon how complete your National Insurance record is. Eligibility is based on how many years you’ve worked or received National Insurance credits. You can find out more about your National Insurance record and get a projection of your State Pension by visiting the UK Government website. As the full state pension is currently £10,000 per annum, this is unlikely to provide enough income in retirement on its own and you will likely want to supplement any state pension you receive with either a workplace or personal pension.
A workplace pension is a retirement savings scheme set up by your employer to help you tax-efficiently save money for future use after you fully or partially stop working. The idea is straightforward – you and your employer contribute a portion of your earnings into this pension pot throughout your working years. This money is invested in various ways, with the goal of growing it over time to provide you with a source of income when you retire. Plus, your pension payments are tax-exempt, and when you wish to use your pension savings, you can take 25% tax-free, up to £273,000! You can find more about workplace pensions here.
Unlike the State Pension or workplace pension, private pensions are entirely your responsibility to arrange. These plans involve making regular contributions into an investment fund of your choice, which is managed by a pension provider. You could have a Self-Invested Personal Pension (SIPP) that allows you to make your own investment decisions. The main advantage of private pensions is that they may offer you more control and flexibility over your investments, enabling you to tailor your pension strategy, but they might be more expensive than a workplace pension, and contributing towards a private pension rather than a workplace pension would mean you would lose out on employer contributions.
By understanding the differences between these three types of pensions, you can make informed decisions that will play a significant role in shaping your financial wellbeing during retirement.
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