A pension is a tax free way to save for your retirement. There are a number of ways to save for a pension and various types of pension schemes available including state pensions, workplace pensions and personal pensions. The pension plan you choose will depend on a number of factors including your age, salary, financial situation and the company you work for.
How much is a State Pension?
The current maximum amount of basic state pension you can claim is £107.45 weekly (as of October 2012) and the maximum state pension amount increases annually.
Once you reach state pension age you will be able to claim the basic state pension, however you must have paid National Insurance (NI) contributions or have been credited with NI contributions during your working life.
How do I get a Pension Forecast or State Pension Statement?
It is advisable to get a State Pension Statement, also known as a pension forecast, so that can receive an estimate of how much State Pension you may receive once you reach retirement age. You can get a State Pension statement either online or through the post.
How do Workplace Pensions Work?
Workplace pensions are arranged by your employer and enable you to save for your retirement. They are also referred to as company pensions, occupational pensions, works pensions or work based pensions.
With a workplace pension scheme a percentage of your salary is automatically paid into your pension. In addition, your employer and also the government will pay into your pension scheme. When you retire the money that has been paid in will be used to pay you an income for the rest of your life. You may be able to take a tax-free lump sum from your workplace pension when you retire if you wish.
The two main kinds of workplace pension schemes are defined contribution and defined benefit pension schemes:
Defined Contribution Pension Schemes – your employer chooses a pension provider who invests the money. How much you receive once you retire will depend on the amount of time you have been paying into the pension scheme, how much you have paid in and how well the investment has done. They are also known as money purchase schemes.
Defined Benefit Pension Schemes – defined benefit pension schemes are also known as salary related or final salary pensions. The amount you receive once you retire is fixed and you will receive the same amount every year. How much you receive will depend on how long you have been employed by your company and what your salary is.
What is Auto Enrollment into a Workplace Pension Scheme?
In October 2012 new legislation was brought in that requires every employer to enroll their employees into a workplace pension scheme automatically if they earn more than £8,105 annually, work in the UK and are aged between twenty two years and the State Pension age.
How do Personal Pensions Work?
A personal pension plan is one that you arrange yourself and could be advantageous if you wish to save additional money over and above your workplace pension. A Personal pension would also be beneficial if you are self employed and are unable to be part of a workplace pension scheme.
Further reading on Workplace Pensions