There are many different types of pension that you might come across, but the majority typically fall into one of these: Defined Contribution (DC), or Defined Benefit (DB).
It’s worth understanding the basics of how these work, as it will have an impact on the options available to you, as well as how you plan to access your retirement benefits when you are ready to retire.
Defined Benefit pension (final salary)
These pensions are becoming increasingly rare, unless you are a government employee, or work in the NHS, fire service, police or armed forces, but they offer valuable benefits for those in the scheme.
They are schemes that run through an employer, where you accrue benefits based on your earnings, length of service and membership in the scheme.
They offer a guaranteed income for life, and usually the option of a tax-free cash lump sum. The age at which you can take benefits is set by the scheme and is typically 60 or 65.
Defined Contribution pension (personal/workplace pension)
This pension is based on contributions set up by you, or through your employer.
If you are in employment you will have been automatically enrolled into your employers’ scheme, unless you opted out, or are under the age of 22, or have earnings of less than £10,000. They work by paying a known amount of money into a pension, typically monthly, by you or possibly your employer, or both.
These contributions are invested into investment funds that will hopefully grow over time, up until your retirement. Your pension contributions will receive tax relief from the Government.
The amount of pension capital that you eventually have for retirement will depend on how much you’ve paid in, how your pension funds have performed, and any charges applied.
There are multiple types of DC pension schemes, one of the most common being a Self-Invested Pension Plan (SIPP), and schemes such as Group Personal Pensions, Executive Pension Plans and Retirement Annuity Contracts.
State Pension
The UK State Pension is the pension that the Government pays most of us when we reach 66, or 67 after 2028.
At the moment, it pays:
- £203.85 per week or £10,600.20 per year
To get the full amount, you will need 35 qualifying years of contributions for National Insurance (NI) credits. You can’t claim the State Pension if you’ve paid in for less than 10 years.
If you don’t have a total of 35 qualifying years, the Government will base your payments on how many years you have paid it for. You get 1/35 of the full amount for every year you’ve paid in. For example:
- 30 years gives you 30/35 x £203.85, which is £174.72 a week
- 10 years gives you 10/35 x £203.85, which is £58.24 a week
You might be able to top up any NI gaps by paying voluntary contributions and can find out more about the State Pension and check your eligibility on www.gov.uk.
Achieving what you want
The Retirement Living Standards set out by the Pensions and Lifetime Savings Association suggests that in retirement a couple would need £19,900 per year as a minimum living standard, £34,000 to live moderately and £54,500 to live comfortably.
There are fewer and fewer people who will benefit from generous defined benefit schemes, and more and more of the UK population are having to rely on saving into a personal pension (defined contribution) scheme.
As a couple’s combined State Pension is just above the minimum lifestyle discussed earlier, saving for the retirement you want is crucial.
If you have accumulated pension benefits and want advice on how these might support your retirement plans please get in touch.
Email nick.birtle@armstrongwatson.co.uk or call 01768 222031.
For more information please visit our pension and retirement planning pages
