Trying to sort out your pension can be intimidating.
First of all, there are many types of pension, with different rules and ways of working.
Then, there is a sea of complicated terms and phrases used within the pensions industry, many of which are hard to understand.
How do you even begin to find your best retirement options in this situation?
To help you get started, we’re going to provide a brief, easy explanation of the main types of pension.
Towards the end of the article, you’ll also find a straightforward guide to some other common terms and phrases relating to pensions.
We hope you find the below helpful.
Defined Contribution Pension
The most common type of workplace pension these days, it is a pension plan arranged by your employer. Both you and your employer can put money into the pot.
By law, in 2018-2019 your employer must pay at least 2% of your annual salary towards your pension. Next year, their minimum contribution will be 3%.
So, suppose you make £30,000 per year. If you put in 3% and your employer puts in 2%, then £1500 is put into your pension pot that year. (£900 + £600; assumes full salary).
This type of pension is one that you set up yourself, independent of your employer.
Also sometimes called a private pension, your provider (often an insurance company) invests the money that you put into this pot, on your behalf.
You can have a personal pension alongside a workplace pension. Indeed, you can have one if you are self employed, or unemployed.
Employers are allowed to contribute to your personal pension, although they are not obliged to.
One handy feature of this type of pension is that it is highly portable. In other words, you can keep putting money into it even if you change jobs.
Think of a SIPP (Self Invested Personal Pension) as a “DIY personal pension.”
With personal pensions, a company usually decides where to invest the money that you’re putting into the pot. With a SIPP, you get a lot more choice over your investments.
For instance, you could invest in government bonds, stocks & shares, and commercial property.
SIPPs can be an attractive option for people who want more investment control, or who want to combine multiple pensions into one pot.
Final Salary Pension
These types of pension are becoming more rare, although some bigger companies and organisations still offer them.
This pension gives you a “guaranteed” annual income once you retire. The exact amount you get each year depends on various factors, such as your earnings and years of service.
So, you do not build up a “pension pot of money” with your employer under this type of scheme, in the way that you do under a defined contribution pension.
Rather, an income is promised to you by your employer upon your retirement.
Some FS schemes will offer death-in-services payments to your spouse or civil partner. Check with your scheme’s administrator if you are unsure of this or other benefits.
This is probably the hardest pension to explain, so bear with us.
SASS is shorthand for “Small Self Administered Scheme”. It is set up by businesses, usually for the benefit of company directors and other key members of staff.
A SSAS is run by a group of Trustees. These Trustees can also be members of the scheme.
Both members and the employer can contribute to the scheme.
This type of pension is often attractive to business owners and entrepreneurial people, since it offers a lot more flexibility when it comes to investment options.
For example, a SSAS could be used to buy your employer’s trading premises. From there, the premises could then be leased back to the company.
Quick Jargon Buster
That covers some of the main types of pension available in the UK. Briefly, here’s a quick break down of some other, potentially-confusing terms in the world of pensions:
● Income drawdown: When you get to your retirement, and you have a pension pot, you can withdraw up to 25% as a lump sum, tax-free. The rest, you can invest somewhere and take gradually as a retirement income. This is called income drawdown.
● Annuity: Instead of going the income drawdown route, you could use your pension pot to buy an annuity. This is a financial product which guarantees you a fixed income for the rest of your life.
● Lifetime allowance: This is the maximum amount of money you are allowed to have saved in pensions, tax-free. In April 2018, the LTA is £1,030,000.
● Annual allowance: This is the amount you can put towards your pension each year, tax-free. In April 2018, the cap is £40,000 per annum.