A pension is a technique to save money for retirement. When you reach retirement age, you will be entitled to a pension, which is a regular monthly payment. If you work and live in the UK, understanding how pensions work in UK might help you plan for a safe future. Contributions to a pension are tax-free, making it an appealing alternative for retirement savings.
You are luck if you work as advisor, as salary of financial advisor in UK are higher. If you work in the United Kingdom and live there, it is likely that your pension will be deducted from your earnings. In the UK there are three types of pensions – workplace pension, state pension and a personal pension. People with jobs have access to all three categories, all of which are helpful to them.
How Pensions Work in the UK?
A pension is a savings plan designed to provide an income to live on when you stop working. When you open a pension fund, you’re basically investing on your future by creating a long-term saving scheme in which you regularly put money in during your working years. Nowadays there are a lot of types of pensions designed to meet the needs of many categories of people. Whichever type of pension you will choose, there are a few rules that unite the different retirement plans available.
First of all, every pension plan has numerous tax and contribution benefits meant to ensure a stable economic future and to help the account holder building up this savings for his life after work. Depending on the plan you’ll choose, you or your employer will pay a small percentage of your salary. This will happen every time you get paid, and you’ll also be able to choose whether to pay one-off contribution.
Also, the government will reduce the impact on the money you bring home by applying a tax relief. When you add money to your retirement account, you’ll basically be investing it, giving it the chance to grow in time. In the future, a date will be set when you will be able to access the money you have collected, which will generally coincide with the day you stop working.
This last rule has been designed to ensure that you have a substantial amount at your disposal when you stop working, and to take away the temptation to withdraw money before you really need it. Currently, you can withdraw and use your pension fund money at the age of 55.
Like any other type of investment, the longer you’ll leave your money on your retirement account, the more are the chances it will grow over time. Read on for more information about the different types of retirement accounts. Maybe, you can also consider to check the forecast of the likely pension income you’ll get when you retire.
The State Pension
The state pension is a sum of money that the government pays you when you reach the predetermined retirement age, which is currently 55 years old. The state pension’s funds are built up by the contribution you pay every month during your working life. In order to get this kind of guaranteed income for the rest of your life, you have to meet some eligibility criteria established by the government.
For instance, you must have at least ten years’ worth of qualifying contributions. The amount the government will pay you every month will depend on the contributions you’ve made during your working life. Although in most cases the state pension by itself isn’t enough to ensure the lifestyle you want, it still represents a very important help, especially when used as a supplementary income to other pensions in your family.
The Workplace Pension
A workplace pension, which can also be called company pension or occupational pension, is a savings plan offered by your employer. This particular kind of scheme is designed so that both you and your employer can contribute to your retirement pot with a percentage of your salary.
By choosing this kind of retirement plan, the government will contribute to your pension as well through tax relief. Basically, by choosing this plan your employers will help you build up your pension pot by paying you a little more if you agree to raise your contributions as well. Currently, there are two types of workplace pension schemes.
The first one is called “defined contribution pension scheme”, which consist in the payment of a percentage of your salary to which your employer also contributes. Your funds are then invested by your pension provider. The amount you get will depend by the performance of the investments and of course by how much you and your employers paid.
Like any other kind of investment, your money could go down as well as up. The second kind of workplace pension scheme is called “defined benefit pension scheme”. By choosing this plan, you’ll just earn a defined amount of money once you reach your pension age. The amount you’ll get is defined by how long you’ve worked for your current employers.
The Private Pension
The last type of pension scheme available in the UK is the private pension, which is a particular kind of individual retirement plan that you arrange with a pension provider yourself. This could be the right choice if you are self-employed. But private pension, which is also called “personal pension”.
It can be set up by anyone who wants to save money for retirement, it’s all up to you because you can have full control over the pension, deciding how much money put in, the frequency, in which assets invest etc. You usually get tax relief on money you pay into a pension and when you reach the pension age, you can withdraw a part of your pension tax-free.
You can make use of compound interest calculator, if you want to compare the investment with pension contribution. Knowing how pensions work can help you plan for a secure future if you live and work in the United Kingdom. Hope this information will be helpful to you.