A pension is money you save towards your retirement – a long-term savings plan with tax relief
The goal is to provide you with an income when you retire.
The money you save is invested to grow it
You can currently save up to £40,000 each year towards your pension tax-free
You can currently save just over £1m tax-free, called the lifetime allowance
There are 3 types: state pensions (which is paid by the government and based on your NI contributions); workplace pensions (which can either be defined benefit schemes or defined contribution schemes) and; personal pensions.
A pension is essentially a long-term savings plan. Regular savings into your pension is called contribution - you are contributing towards your retirement. Those contributions (the money you save) go into a 'pension pot', along with the contributions of other savers, which is then invested. The goal is to grow the value of that money whilst you’re working, so it provides you with more income when you retire. It’s invested in the stock market, for example.
The aim of this is to try to increase the value of the money you save by the time you get to retirement age. We will cover the type things your pension is invested in later on in the series.
You receive a tax-free allowance every tax year from the government, which means anything you save up to that amount will not be taxed. Currently, for 2018/19 tax year, this is £40,000. You also have a lifetime allowance, which is currently £1,030,000 for 2018/19. That means any amount up to this sum that you save into your pension won’t be subject to taxation – you don’t get taxed on it.
Types of Pensions
There are essentially 3 types of pensions:
workplace pension, and;
Your workplace pension can take on one of two forms: defined benefit or defined contribution scheme, which is expanded on below.
A state pension is provided by the state (government) and determined by your national insurance (N.I) contributions: the contributions that you make whilst working; and credits you receive when not working, such as if you claim job seekers allowance. The rules are constantly changing, but essentially, you will need 30 years of NI record to get the maximum new State Pension, which is currently set at £122.30 per week.
We are not going to cover the state pension in great detail, as that pension isn’t determined/ controlled by you in the same way as your defined pensions. It’s the latter two that we want to focus on, as these have the most significant bearing on the income you have available to you at retirement. We’ll be covering them over the next couple of articles in this series. If you want more info on your state pension and want to get a statement on it, visit the state pension page on www.gov.uk.
If you would like more information, go to www.gov.uk or the website for the Department of Work and Pensions, which is www.dwp.gov.uk. You can also visit other sources like www.citizensadvice.org.uk