Helping you to understand the pension jargon so you can plan your retirement with confidence
In its simplest guise, a Pension is a savings plan which has tax benefits, but there is much jargon which you’ll need to understand.
You’ll pay into your pension and the proceeds will help fund your retirement (whether or not you have stopped working) – which generally has to be over the age of 55. Currently, the contributions you pay in usually gain tax relief, the fund itself grows virtually tax-free, and you are allowed to take a lump sum tax-free when you take benefits.
There are only two types of Pension – a Company Pension and aPersonal Pension. All the others are a variation of these. Just to confuse the issue, most companies offer personal pensions to their employees!
A true company scheme is either a Final Salary pension scheme, which is where your pension is based on your salary and service during your employment period, or a Money Purchase scheme, which is where your benefits depend on the amount put in and the growth of the fund.
The main difference between the latter and personal pensions is that if you took out a money purchase scheme before 2006 you may be able to access more than 25% of the fund as a tax-free cash sum. The final salary scheme has guarantees which are not dependent on the underlying investments so are a very valuable asset to have.
These are now the most common type of Pension arrangement and can accept contributions from your employer, and even your parents. The money paid in is invested in a pension fund and (hopefully!) grows to give you an income when you retire. The advantage is that any contributions that you make have an immediate boost in the form of tax relief.
Personal Pensions include Stakeholder plans, Self Invested Personal Pensions (SIPPs) and Personal Pensions themselves. The main difference is the choice of investments available within each. Stakeholder plans are generally simplistic with a limited fund range, Personal Pensions usually have a more extensive fund range, and SIPPs are able to invest in such items as stocks and shares, land, and commercial property.
Some people are confused about the term ‘Contracting out’. This was where some people signed a document to have some of their National Insurance contributions paid into a personal pension plan. This does not affect their entitlement to the current basic state pension as well, and it is no longer possible to do.
At Monetary Solutions, you can book a free initial consultation about any financial matters, so please call us on 020 8655 8488.
The value of your investment can go down as well as up. You may get back less than your original investment. This is based on current taxation which is subject to change.