What is a pension?
What are the different types of pension schemes?
What is a tax free lump sum?
What is an annuity?
How do final salary /defined benefit schemes work?
How do defined contribution/money purchase schemes work?
What is a pension?
A pension is a source of regular income to live on when you retire.
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What are the different types of pension schemes?
A personal pension is one that you take out yourself, for example if you're self-employed or your employer doesn't offer a pension arrangement. They are a type of money purchase pension.
You choose the provider and make arrangements for your contributions to be paid.
Stakeholder pensions are money purchase pensions and must have certain features. Some of these are:
- limited charges;
- low minimum contributions;
- flexible contributions;
- penalty-free transfers;
- a default investment fund – a fund your money will be invested in if you don't want to choose.
- Company (occupational) pensions
An occupational pension is a private pension scheme run by some employers and is also known as a works pension, company pension or superannuation.
- Group personal pensions (through your employer)
Some employers offer these schemes. They build up a personal fund for each employee which is converted into an income when you retire. They are a type of money purchase pension. The scheme is run by the pension provider that your employer chooses, but it is an individual contract between you and the provider.
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What is a tax free lump sum?
Most people who have a pension want to take the lump sum when they retire - this is sometimes known as the tax free lump sum. This lump sum can be used for almost any purpose, such as:
- Paying off debts and loans
- Using it for property purchase
- Paying for a holiday
- Investing it to provide an income (Buying an annuity)
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What is an annuity?
An annuity converts your money purchase pension into an income for the rest of your life.
Annuities are sold by life insurance companies and you can add different options and get different types depending on your needs and circumstances.
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How do final salary /defined benefit schemes work?
While you are working, you pay a percentage of your pay into the scheme. When you have stopped working you then receive regular payments based on how long you have been a member and your pay when you retire.
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How do defined contribution/money purchase schemes work?
You build up a pension fund using your contributions and your employer’s contributions (if they make any) plus investment returns (if any) and tax relief.
When you retire you can take a tax free lump sum from your fund and use the rest to secure an income – usually in the form of an annuity.
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