A Guide To Personal Pensions

Thinking about the future can be disconcerting, especially if you do not fully understand what people mean when they talk about pension plans. Sorting out your pension plan is an important step in making sure that you are comfortable when you reach retirement age, and the good news is that it is as not as complicated as it sounds. 

What Is a Pension?

A pension is an arrangement to provide you with an income when you are no longer in employment. Rather than being a severance package (a lump sum paid at the termination of employment), a pension is granted when you retire and is set up in regular instalments. Retirement plans (or pension schemes) come in many different forms, but there are 2 main ones; personal pensions and state pensions.

How Does a Personal Pension Differ From The Rest?

Rather than being based on National Insurance contributions like the state pension, a personal pension puts you in control of your retirement funds. You can save money for your retirement by handing it over to a Pension Provider, who will then invest it for you. This investment will increase its value over time because of interest (the percentage increase of the value of your money). As an added encouragement to save your money, the Inland Revenue (the government department responsible) will add money onto your savings (basically the amount you’ve already paid in tax on the money that you are saving). There are limits to this, such as only being able to save 17.5% of you salary before the age of 35. Also, while you can only have one state pension, you are allowed as many personal pensions as you want (provided they do not exceed the limit).

The Occupational Pension

Some employers will have an occupational pension, which is a scheme they have set up for their employees. It works in the same way as a personal pension, except that your employer will invest a percentage of your pay packet for you. This is also called a company pension.

How Do I Claim My Personal Pension?

When you finally retire, your pension fund will allow you to receive the money you have saved in regular instalments (it’s actually an annuity, but it works in the same way as a pension would). As an added bonus, you can also withdraw 25% of your pension fund the moment you leave employment as a tax free sum. The process of receiving your pension usually differs from provider to provider, but you will normally be required to notify them the moment you announce your retirement. Unlike the state pension, there is no age limit to this.