Pensions - the basics

Here at iSIPP, our mission is to put the power to take control of your financial future in your hands. Saving into a pension is one of the most efficient ways you can begin to build your savings and support yourself later in life. In the UK there are several types of pensions. The good news is you don’t have to rely on just one – you can combine benefits and payments from each to provide an income in retirement. How much you will need to save into a pension is dependent on your aims and circumstances. However, it is a good idea to have a grasp of the pension basics and landscape so you can make the choices that are right for you and your goals.

The pension basics

There are three common types of pensions in the UK; state pension, private pensions (such as a SIPP), and workplace pensions. Here, we will explain in simple terms what each are and the kind of benefits you can expect to receive.

The state pension

The State Pension is an amount paid to each UK citizen once they reach a certain age. The amount you receive is dependent on national insurance contributions throughout your life. You can claim your state pension once you reach state pension age. This is currently set by the UK government at age 66 for both men and women. The age you can claim state pension tends to increase over time, as the government responds to factors such as longer life expectancy in the population. You can check your expected state pension age using the government’s state pension age checker tool. State pension age is expected to reach 68 by the year 2028, so If you plan to retire earlier than this age it is important to have other financial options at your disposal. This is where the two other types of UK pensions could come in.

Workplace pensions

By law, every employer must automatically enroll eligible employees into a workplace pension scheme. This means a portion of your salary is invested into a pension pot. The advantage of a workplace scheme is that your employer also contributes to the pot, helping you build a larger pot over time. In addition to this, the government also contributes to your pension in the form of tax relief.

Under auto-enrolment rules there is a minimum amount both you and your employer must contribute to the workplace pension scheme, but you can choose to increase this if you wish.

Although it is a legal requirement for businesses to automatically enroll eligible employees into a workplace pension scheme, you are allowed to opt out at any time. However, if you do, your employer may also stop contributing to your pension depending on the scheme rules.

As people tend to move to different companies across their working life, they may have several workplace pension pots. It is possible to consolidate these pots in a private pension scheme such as iSIPP in a process known as pension consolidation.

Private pensions

Private pension schemes otherwise known as personal pensions are another way to save for your retirement. Personal pensions are Defined Contribution pensions. This means that what you receive depends on how much you have paid in and how well your investments have performed.

How much you pay into a private pension is your choice (although there may be minimum amounts depending on your provider). The pension provider will also claim tax relief on your contributions from the government on your behalf and add this to your savings.

The most common type of private pension is a SIPP which stands for Self-Invested Personal Pension. Here at iSIPP, we put controlling your pension savings back into your hands. We provide access to investment options that will suit your needs, risk appetite, and ethical choices. You can find out more about what we do here and discover our range of funds.

Summary

Pensions are a tax-efficient way of saving for your future. Here we have explained the three categories of pensions available in the UK to help you better understand your choices. Remember, in the case of both private and many workplace schemes, pensions are an investment product. This means the value of your investment can go down as well as up and you may get back less than you put in.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.