What is a pension?
A pension is a way of saving for your retirement. They’re a tax-efficient way for you to save because unlike other types of savings plans, they benefit from tax relief.
This means that for every 80 pence you put into a pension, the taxman will turn it into £1. Tax relief depends on your individual circumstances and may change. So you could get more or less than this, depending on how much tax you pay.
Your retirement savings are invested to help them grow
You can stick with the investment you chose with the help of your financial adviser, or refine it to suit your changing circumstances.
Remember that investment returns are never guaranteed. So while your savings could grow, their value can also go down. This means you could get back less than you put into your plan.
Take your retirement savings in a way that suits you
When you reach age 55, you'll be able to access your retirement savings – even if you’re still working. So whenever the time feels right for you, you'll find three main ways to enjoy the money you’ve saved:
- Take it all as cash – have all your retirement savings paid as a cash lump sum (25% tax free, tax due on the remaining 75% if you choose to access all of your retirement savings).
- Enjoy flexible access to your savings – take the income you need, when you need it.
- Buy a secure income – enjoy a guaranteed regular income for the rest of your life.
Of course, there's no rush to do anything. You can put things off until whenever you're ready.
Deciding how much to save
Generally speaking, the more you save, the more you can expect to get back. Although, the value of your retirement savings can go down as well as up - so you might get back less than what you started with.
You can choose to save as much as you can afford. If you want to, you could save up to 100% of your earnings into your pension each tax year.
There's an upper limit on the amount that you can save into pensions each tax year. This is known as the annual allowance. If you go over this amount, a 40% tax charge will apply.
What types of pension are there?
A personal pension is one that you set up yourself. The money you save into a personal pension is invested to help it grow. Of course, this isn’t guaranteed, so if your investments perform poorly, you could get back less than you started with.
You also benefit from tax relief on the money you save and your savings build up largely tax free. Of course, tax relief depends on your individual circumstances and may change.
Your employer won’t usually save into a personal pension, although they can if they want to.
When you reach age 55, you’ll have three main ways to enjoy the money you’ve saved. How much retirement income you eventually get will depend on:
- how much retirement savings you've built up
- how well your investments perform
- any charges that may apply
- how you choose to enjoy your retirement savings
A workplace pension is set up by your employer. Depending on your age and salary, you’ll be enrolled into your employer’s workplace pension automatically. You don’t need to do anything. What’s more, when you save for your future, your employer will too.
Types of workplace pension
- A defined contribution pension plan is a type of pension where you and sometimes your employer, save for your future. The money you put into a defined contribution pension is invested to help it grow.
Of course, this isn’t guaranteed, so if your investments perform poorly, you could get back less than what you started with. When you reach age 55, you’ll have three main ways to enjoy the money you’ve saved.
- A defined benefit pension plan is a type of pension where your employer promises to pay you a set amount of income when you retire. This is also referred to as a ‘final salary scheme’. The income you get when you retire depends on how long you’ve worked for your employer and how much you’re earning when you stop working.
Similar to a defined contribution pension, the money you save is invested to help it grow and you’ll have three main ways to enjoy the money you’ve saved once you’ve reached age 55.
The state pension is provided by the government. You’ll receive a state pension when you reach state pension age.
How much state pension you get depends on how much National Insurance contributions you’ve paid while you’ve been working.
State retirement income comes in two main forms:
- The new State pension
This provides a flat rate payment to people who have met the minimum National Insurance Contribution requirements. In the current tax year (2019/20), the new State pension is £168.60 a week for a single person. This applies to a man born after 6 April 1951 or a woman born after 6 April 1953.
- State Second Pension
The State Second Pension (S2P) is an earnings-related pension that replaced the former State Earnings Related Pension Scheme (SERPS) in April 2002. It's designed to top up the Basic State Pension and it’s based on earnings - providing the most benefit to people on low incomes.
We’ve packed our personal pension full of flexibility. So you can adjust things as and when you need to.
Our income drawdown product gives you the freedom to take the income you need, when you need it.