In the current financial climate, planning ahead has never been more important. While you will likely accrue a state pension throughout your working life, in many cases, this is far less than most people would be comfortable and able to live on.
By planning ahead and evaluating retirement funding through different types of private pensions, you can help to avoid any possible shortcomings and realise your full financial potential in your retirement.
What is classed as a private pension?
Private pensions can be defined as both a workplace pension set up through your employer and a personal pension which would be set up by yourself. A private pension is essentially a great way for you to supplement the amount you will receive from your state pension.
A workplace pension is usually referred to as a Defined Contribution scheme that is arranged through your employer, though some employers may offer a salary sacrifice scheme. Both schemes work by yourself and your employer contributing regularly, with the amount being based on your salary. The pension provider that your employer has chosen will then use the contributions to invest in the stock market and other assets through funds.
On the other hand, a personal pension is also a defined contribution pension scheme, with the difference being that you select the provider yourself and make the contributions. Going with a personal pensionwill offer 2 main benefits, the first being that you are able to save more money for your retirement, and secondly, you can gain tax relief in doing so.
Your chosen pension provider will claim back the tax relief and put it back into your private pension pot, this would be done at the basic tax rate to start with however, if you are paying a higher rate of tax, you would need to claim the higher amount back through a tax return to the HMRC. Also, it would be you who decides which funds to invest your money into and not your employer.
Once your pension provider has been selected, it would then work as a Defined Contribution pension in that you decide how much you would like to pay into it, and you can watch it grow through the investments you have made.
How many types of pensions are there in the UK?
There are various different types of pensions in the UK, the most common are Defined Contribution and Defined Benefit Schemes.
What are the 3 main types of pensions?
The three main types of pensions are Defined Contribution Scheme, Defined Benefit Scheme and State Pension.
Defined Contribution Schemes
Otherwise known as Money Purchase Pension Schemes, Defined Contribtion Scehems can either be a workplace pension set up by your employer, or a private paying pension that has been arranged by yourself.
Contributions paid by you or your employer are put into investments via the pension provider. The value of your pension pot can fall as well as rise depending on how the investments perform. Some schemes transfer your funds into lower-risk investments as you near retirement age.
The amount you will receive when you start taking your pension depends on how much has been invested, how well the investments have performed and lastly how you decide to take the monies (regular payments, lump sum, or smaller sum payments). You are also usually able to take 25% of your pension tax-free.
Defined Benefit Schemes
Otherwise known as a Final Salary Pension Scheme, Defined Benefit Schemes are usually workplace pensions arranged by your employer. The amount you will receive depends on the scheme’s rules. This is usually based on your salary and your length of time with your employer.
Your pension provider will guarantee an income each year from your scheme retirement date.
You can usually take a tax free lump and a reduced annual pension or you can opt to take a higher annual pension with no tax free lump sum.
State Pension
A State Pension Part of the UK government pension arrangement, a State Pension is a regular payment from the government you can claim once you reach state pension age. Your state pension age will depend on the year you were born and gender.
The benefits you will receive vary depending on your age and how many qualifying years of National Insurance payments you have.
One of the main takeaways to remember regardless of the type of pension you have is that it is important to have at least one. Starting early when it comes to retirement planning is crucial however it is never too late to start saving for your pension to help you plan for your future.
If you are ever in doubt about the best retirement options for you, seek private pension advice from our dedicated pension professionals. It has been proven that those who seek advice are better off in retirement than those that do not.
