What Are The Different Types of Pensions?
When planning for your retirement, understanding the different types of pensions is essential. Most pensions fall into Defined Contribution (DC) and Defined Benefit (DB). These various pension schemes significantly impact your retirement options and how you access your benefits when you retire.
Defined Benefit Pensions
Defined Benefit pensions are increasingly rare, but they offer valuable benefits for those in the scheme. These employer-run schemes allow members to accrue benefits based on their earnings, length of service, and membership.
Defined Contribution Pensions
A Defined Contribution pension is set up by you or through your employer. DC pensions work by paying a known amount of money into a pension, typically monthly. A separate pension company usually runs the pension plan, and your contributions are invested into funds that will grow over time, ready for your retirement.
The amount of pension capital you eventually have for retirement will depend on several factors, including how much you’ve paid in, how your pension funds have performed, and any charges applied.
It’s important to note that DC pensions are flexible but without guarantees. The value of a pension through F G Watts Financial Advisers will be directly linked to the performance of the selected solutions.
Tax Relief on Pension Contributions
Your pension contributions will receive government tax relief, boosting your retirement savings. However, the levels and bases of taxation and reliefs from taxation can change over time. The value of any tax relief is dependent on individual circumstances.
Self-Invested Personal Pension (SIPP)
A Self-Invested Personal Pension (SIPP) is a Defined Contribution pension offering various investment choices. They offer numerous different funds to invest in and the ability to hold individual stocks, shares, and other assets.
SIPPs can provide a modern, flexible way of saving for retirement, but it’s crucial to take advice to understand if it is right for you. SIPPs will not be suitable for everybody and are generally recommended for those experienced in actively managing their investments.
Please note: A SIPP’s value can fall and rise. You may get back less than the amount invested.
Self-Employed Pension Planning
If you’re self-employed, you won’t be able to join occupational pension schemes like those employers offer. However, you’re still entitled to the State Pension, provided you have enough National Insurance credits. It’s essential to consider additional individual retirement arrangements to enhance your financial stability during retirement.
State Pension
Once you reach the State Pension age, you can receive regular payments from the government. The new single-tier State Pension requires 35 years’ worth of National Insurance credits to qualify for the full amount, five years more than the previous basic State Pension.
Workplace Pensions
Workplace pensions are Defined Contribution pension plans set up through your employer. Though you can set up your pension, many people begin their pension savings journey via their employer’s scheme. Your employer will automatically enrol you into their scheme unless you opt-out.*
*Opting out should be carefully considered, especially if you don’t have any other pension savings.
Auto-enrolment encourages long-term saving habits and simplifies the process as your employer handles most of the administration. Moreover, your employer will contribute to your pension alongside your contributions; in some cases, they may contribute more if you do.
Throughout your career, you may accumulate several workplace pensions from different employers. Therefore, it’s prudent to regularly review your pension performance and ensure your investments remain suitable. Like personal pensions, you can access your workplace pension savings from age 55 (rising to 57 in 2028), allowing you to take tax-free cash, generate an income, or withdraw some or all of it.
Please note that this information is intended to provide an overview of the available pensions and is not personal advice.
The value of an investment with F G Watts Financial Advisers can fluctuate, and you may get back less than the amount invested. Taxation levels and reliefs can change at any time and depend on individual circumstances.