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This section will help you understand the benefits of using a pension to save for your retirement, what type of pensions are available and what you need to think about.
Saving for retirement is something that most of us put off for as long as we can. But the reality is that the sooner you start paying into a pension the higher your income in retirement is likely to be. If you're working you're usually building up the right to a basic State Pension – and possibly an additional State pension – but these may not be enough to give you the standard of living you want.
This section will help you to understand the benefits of using a pension to save for your retirement, what type of pensions are available, how they work and how to start saving for your retirement.
If you would like more detailed information, get our Pensions booklet. You can download or order them online at Free printed guides.
You may be eligible for a State pension or Pension Credit depending on your circumstances.
If you're working, you are usually paying National Insurance contributions (NICs). This means you are building up a right to get a basic State Pension when you reach State Pension age. This is currently 65 for men and between 60 and 65 for women depending on when you were born, but is scheduled to go up to 68 for men or women retiring from 2046. To calculate the date of your State Pension age, see the Directgov State Pension age calculator – see Related links. However, the government announced in the June 2010 Budget that it will consult on raising the State Pension age to 66 from 2016.
If you’re nearing retirement or already retired but not getting the full State Pension, you may be able to pay voluntary NICs to boost your State Pension. You can use The Pensions Advisory Service’s online planner to help you decide – see Related links.
More people can now claim the State Pension – you can be credited with contributions, for example if you’ve spent time out of the workplace to care for someone or have been claiming certain benefits. For more information visit the Directgov website – see Related links.
You can find out how much State Pension you may get by going to the Directgov website. You can also use the online State Pension profiler to get a quick estimate of your basic State Pension, or you can apply for a full State Pension forecast – see Related links.
If you're employed (not self-employed) you may also be building up an additional State Pension, known as the State Second Pension (S2P) but formerly known as SERPS. The amount of S2P or SERPS you get depends on your earnings and your NIC records throughout your working life.
Self-employed people cannot build up a pension through S2P or SERPS. People who cannot work because of long-term illness or disability, and carers may get some State Second Pension.
For more information on State Pensions or to get a forecast of how much your State Pension will be, see the Directgov website at Related links.
If you are an employee, and earning above a certain level on which you've paid National Insurance contributions, you are automatically included in the State Second Pension unless you decide to leave it (called contracting out). If you are contributing to your employer's occupational pension scheme, it may be a contracted-out scheme - check your scheme to find out.
If you decide to contract out:
The option to contract out of S2P will be removed from 6 April 2012, although final salary occupational schemes will keep the option.
For more information, see The Pension Service booklet Contracted-out pensions – see Related links.
Your decision about whether to contract out depends on, among other things, your own personal attitude to investment risk. Your decision is about now and the future but you should review it every year because things change. It does not affect past years in which you were contracted out.
For more information download our factsheet The State Second Pension - should you be contracted out? from Free printed guides, where you can also order it online.
Pension Credit is designed to make sure that people over the minimum State Pension age have a minimum income and that those aged 65 and over with modest savings get some credit for having saved.
For more information on Pension Credit see the Directgov website at Related links.
Pensions you get from your employer and pensions you start yourself differ. Make sure you understand what's available to you and how they work.
Pensions are long-term investments with special tax rules – for example, you get tax relief on contributions.
You can generally access the money in your pension fund from age 55. You don’t have to stop working to do this.
The way your pension works will depend on the type of pension you have. There are three main types:
For how each type of pension works, see Types of pensions.
If your employer offers a pension scheme it's a good idea to find out what type it is and how you can join. Your employer makes all the arrangements and may even contribute to it.
In future all employers will have to offer and contribute to a pension to help more people save for their retirement. Employers who haven't offered an occupational pension in the past may set up their own scheme, or may pay pensions into a new central scheme called National Employment Savings Trust (NEST). The requirement on employers will be introduced in stages from 2012, although, at the time of writing, a three-month review into some of the provisions relating to NEST has been announced. For more information see The Pensions Advisory Service’s website. For information about NEST, see the NEST Corporation’s website – see Related links.
All employers with five or more employees have to offer access to a pension scheme. If your employer doesn't offer a pension, there are lots of pension providers for you to choose from to take out your own pension. You can go to a provider direct but bear in mind that their representatives can only advise you on their company's own products, or ones they have adopted from other companies. Alternatively you can get help in choosing a pension and provider from a financial adviser.
The Pensions Advisory Service is a not-for-profit organisation that can answer your questions about any pensions – see Related links.
You can compare personal and stakeholder pensions using our Comparison tables.
You can pay as much as you like into your pension schemes, but tax relief limits apply to your annual and lifetime contributions. These limits apply to both salary-related and money purchase pensions.
You can pay as much as you like into your pension schemes. However, if you are a UK taxpayer you’ll only get tax relief on up to 100% of your earnings. For example if you earn £20,000 but put £25,000 into your pension scheme, you will only get tax relief on £20,000.
You can get tax relief on a limited amount of contributions if you are not earning.
In addition, there is an annual allowance which limits the amount of money you can put in each year. This limit is set by HM Revenue and Customs and changes each year. The limit for 2010/11 is £255,000. Any contributions you make over this limit will be subject to an annual allowance tax charge which is currently 40%.
The government is considering major changes to the level of the annual allowance, which could mean it significantly reduces from 2011/12. Check with your adviser to see how it will affect you.
There is a lifetime allowance which limits the amount you can accumulate free of tax in all your pension funds when you come to draw your benefits. This is £1.8m for the tax year 2010/11. You have to pay tax on any excess over the £1.8m allowance.
Salary-related pension scheme benefits are given a value which counts towards the £1.8m lifetime allowance.
Any amount above the lifetime allowance can be paid as a pension benefit but is subject to tax of up to 55%. You may still have to pay tax on your income when you start to draw the pension.
What you pay into a pension plan depends on what you can afford. It can be anything from as little as £20 a month to your monthly salary, if you wish. The earlier you start the better. This is because the more time your savings have to grow, the bigger your pension is likely to be.
Use our Pension calculator to see what your pension fund could be worth at retirement using the amount you can afford to pay in. Just enter the amount you can contribute and it will calculate what your pension fund could be worth if it grows at certain rates each year.
The figures you see in the Pension calculator are estimates – they are not guaranteed. The actual pension income you receive will be affected by future changes in things like interest rates, inflation and investment growth.
Retirement planning isn't a one-off task so it's important to review your pension plans. The way you receive your pension will depend on the type of scheme you are in.
You can generally take your pension from age 55. The way you receive your pension will depend on the type of scheme you are in – see Retirement options.
All income from pensions and annuities bought with your pension fund is normally taxable. You may pay less tax once you retire because most people aged 65 and over are eligible for a higher personal allowance.
Retirement planning is not a one-off task. Review your plans regularly to make sure you’re setting aside enough and that you’re saving in the best way. You should always review your plans if your circumstances change.
Make sure you get an annual statement from your pension provider and check to see how much your fund has accumulated. If you’ve had a gap in employment, for example to study, or look after children or a relative, you may find that it’s not enough to give you the income you want in retirement.
If you contribute to an occupational pension scheme, the scheme itself may offer the option for making additional voluntary contributions (AVCs).
You can also top up through a private arrangement with either:
If you already contribute to a group personal pension, personal or stakeholder pension you can top up your fund by increasing your contributions. For more information get a free copy of our Pensions booklet. You can download or order it online – see Free printed guides.
Use our Pension calculator to estimate the amount of pension income you could get when you retire. This is worked out from the level of regular contributions that you choose to pay into a personal or stakeholder pension. Just enter the amount you can contribute and it will calculate what your pension fund could be worth if it grows at certain rates each year.
There are three types of non-State pensions. Some are offered by employers and some you can start yourself. They are:
If you work for a business with fewer than five employees, your employer does not have to offer you access to a pension scheme. You should still check what’s available, as some small employers may offer a scheme anyway.
The government is planning changes that will mean all employers will have to offer and contribute to a pension in future. Employers who haven't offered a pension in the past may set up their own scheme, or may pay pension contributions into a new central scheme that is being set up. This is expected from 2012. The Pensions Advisory Service website has more information – see Related links.
Although you don’t have to join any pension scheme offered through your job, it’s usually a good idea to join an occupational pension scheme if it’s available because:
Not all pensions offered by employers are occupational pensions. Your employer may offer a stakeholder pension or a personal pension through a group personal pension arrangement. These pensions are not called occupational pensions even though the employer may contribute.
Some employers offer these schemes, also called final-salary or defined-benefit schemes. Find out about the benefits and risks of these schemes. They usually provide a pension based on:
The scheme is run by trustees who look after scheme members’ interests and your employer contributes to the scheme.
Your employer is responsible for ensuring there is enough money at the time you retire to pay you the pension, but see Risks in these schemes below.
Example
Bill belongs to an occupational pension scheme at work. It is a salary-related scheme. The accrual rate is 1/60th. This means Bill can expect a pension of 1/60th of his pre-retirement pensionable earnings for each year he belongs to the scheme.
Bill retires at 65 on a salary of £24,000 a year, having been in the pension scheme for 10 years.
His pension is: 10 x £24,000 divided by 60 = £4,000 a year (less if he takes any lump sum).
Think carefully if you are planning not to join your employer's pension scheme. It is not usually a good idea to turn down a pension scheme to which your employer will contribute on your behalf.
The benefits of these schemes are that:
Some salary-related occupational schemes have become insolvent and there wasn't enough money in the employer's pension scheme to pay the pensions it had promised to its current and former employees.
The government set up a Pension Protection Fund in April 2005 to protect members of salary-related schemes. The fund pays some compensation to scheme members whose employers become insolvent and where the scheme does not have enough funds to pay members' benefits. The level of compensation may not be the full amount. For more information visit the Pension Protection Fund website – see Related links.
If you change jobs, you stop paying into the pension and can leave it where it is (called a preserved or deferred pension). Alternatively you may wish to transfer it to your new employer, but there are risks and costs associated to that. You should take advice if you are thinking of transferring your pension. For more information get a free copy of our Pension transfers booklet. You can download or order it online – see Free printed guides.
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Some employers offer these schemes. They build up a personal fund for each employee which is converted into an income at retirement. They are a type of money purchase pension. For more information get a free copy of our Pensions booklet. You can download or order it online – see Free printed guides.
The scheme is run by trustees who look after scheme members’ interests and the employer usually contributes to the scheme. The employer deducts your contributions from your salary before it is taxed.
Money purchase pensions 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. It helps to think of money purchase pensions as having two stages:
Stage 1
The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. You can usually choose from a range of funds to invest in. Remember though that the value of investments may go up or down. The Pensions Advisory Service (TPAS) has an online investment choices planner to help you decide how to invest your contributions – see Related links. For information in print, get a copy of The Pensions Regulator’s guide Making pension fund choices – see Related links.
Stage 2
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 a lifetime annuity.
The amount of pension income you’ll get will depend on:
For more information about annuities and other retirement options, see Retirement options.
The amount your employer puts in may depend on how much you are willing to save, and may increase as your get older. For example your employer may be prepared to match your contribution on a like-for-like basis up to a certain level, but could be more generous. If you can afford to, it may be a good idea to maximise what your employer pays in. Use our Pension calculator to help you work out how extra contributions from you and your employer could improve your retirement income.
If you change jobs, you stop paying into the pension and can leave it where it is (called a preserved or deferred pension). Alternatively you may wish to transfer it to your new employer, or to a stakeholder or personal pension, but there are risks and costs associated to that. You should take advice if you are thinking of transferring your pension.
Some employers offer these schemes. They build up a personal fund for each employee which is converted into an income at retirement, but they differ from occupational defined contribution schemes. They are a type of money purchase pension. For more information download our Pensions booklet from Free printed guides, where you can also order it online.
The scheme is run by the pension provider that your employer chooses, but it is an individual contract between you and the provider. The provider claims tax relief at the basic rate and adds it to your fund. If you are a higher-rate taxpayer, you will need to claim the additional rebate through your tax return.
The pension fund builds up using your contributions and, where they are made, your employer’s contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:
The pension fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. You can usually choose from a range of funds to invest in. Remember though that the value of investments may go up or down. The Pensions Advisory Service (TPAS) has an online investment choices planner to help you decide how to invest your contributions – see Related links. For information in print, get a copy of The Pensions Regulator’s guide Making pension fund choices – see Related links.
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 a lifetime annuity.
The figures you see in the Pension calculator are estimates - they are not guaranteed. The actual pension income you receive will be affected by future changes in things like interest rates, inflation and investment growth.
If you change jobs, your group personal pension is usually automatically converted into a personal pension and you continue paying into it independently, but you should check whether your new employer offers a pension scheme. You may find you'll be better off joining your new employer's scheme, especially if the employer contributes. Compare the benefits available through your employer's scheme with your group personal pension. If you decide to stop paying into a group personal pension, you can leave the pension fund to carry on growing, but check whether there are extra charges for doing so.
Stakeholder pensions have to meet minimum standards laid down by Government. Some employers offer them or you can start one yourself. They are money purchase pensions and the minimum standards are:
If one is offered through your employer, they will have chosen the pension provider and they may have arranged for contributions to be paid from your wages or salary. The employer may contribute to the scheme.
Your employer deducts contributions from your pay and sends them to the pension provider. The pension provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate taxpayer, you will need to claim the additional rebate through your tax return.
Money purchase pensions build up a pension fund using your contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:
You can check to see if a stakeholder pension might be suitable for you by trying our Stakeholder pensions decision tree. Alternatively you can download our Stakeholder pensions and decision trees factsheet from Free printed guides, where you can also order it online.
If you change jobs, you should check whether your new employer offers a pension scheme. You can continue paying into your stakeholder pension but you may find you'll be better off joining your new employer's scheme, especially if the employer contributes. Compare the benefits available through your employer's scheme with your stakeholder pension. If you decide to stop paying into a stakeholder pension, you can leave the pension fund to carry on growing, but check whether there are extra charges for doing so.
If your employer doesn't offer any pension scheme, you're self employed, or even not working, you can check to see if a stakeholder pension might be suitable for you by trying our Stakeholder pensions decision tree. Or you can get a free copy of our Stakeholder pensions and decision trees booklet. You can download or order it online – see Free printed guides.
If you decide on a stakeholder pension, you choose the pension provider yourself and make your own arrangements to pay contributions.
You can compare stakeholder pension features and costs using our Comparison tables.
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. The provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate taxpayer, you will need to claim the additional rebate through your tax return. You also choose where you want your contributions to be invested from the range available from your provider. For more information get a free copy of our Pensions booklet. You can download or order it online – see Free printed guides.
The fund builds up using your contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:
The amount of pension income you'll get will depend on:
You can compare personal and stakeholder pension features and costs using our Comparison tables.
A personal pension may be offered through your employer. This would be a Group personal pension
If you change jobs check whether your new employer offers a pension scheme. You can continue paying into your personal pension but you may find you'll be better off joining your employer's scheme, especially if the employer contributes. Compare the benefits available through your employer's scheme with your personal pension. If you decide to stop paying into a personal pension, you can leave the pension fund to carry on growing, but check whether there are extra charges for doing so.
The self-invested personal pension (SIPP) itself is a pension wrapper that holds investments until you retire and start to draw a pension income.
SIPPs are designed for people who want to manage their own fund by dealing with, and switching, their investments when they choose. They may have higher charges than other personal pensions or stakeholder pensions. For these reasons, they are more suitable for large funds and for people who are experienced with investing.
With standard personal pension schemes, your investments are managed for you within the pooled fund you have chosen. SIPPs are a form of personal pension scheme that give you the freedom to choose and manage your own investments. Or you can employ and pay for an authorised investment manager to make the decisions for you.
Most SIPPs allow you to select from a range of assets, such as:
This list is not exhaustive and different SIPP operators will offer different ranges of investment choices.
It’s unlikely that you will be able to invest directly in residential property within a SIPP. Residential property can’t be held directly in a SIPP with the tax advantages that usually accompany pension investments. But, subject to some conditions including restrictions on personal use, residential property may be held in a SIPP through collective investment vehicles, such as real estate investment trusts or property trusts, without losing the tax advantages. However, not all SIPP operators accept this type of investment.
Pension transfers can be complicated and there are many things to think about before going ahead.
If you are thinking about transferring your current pension(s) into a new personal pension plan or self-invested personal pension (SIPP) we've set out seven key questions for you to consider. But remember, whether a transfer is suitable or not will very much depend upon your individual circumstances and objectives. This information cannot cover everything you will need to think about but they can help you to start.
If the scheme you are thinking about transferring out of is an occupational salary-related pension scheme there are some specific risks involved which you should be aware of. Our Salary-related pension transfers printed guide has more detailed information – you can download or order it online at Free printed guides.
It can be difficult to make suitable decisions without advice, even when you have all the information you need. So unless you are absolutely sure, you should seek professional financial advice.
If you decide to get advice use this information to make sure that your adviser has given you full answers to each of these questions.
It may be helpful to print it out and take it with you to any meetings with an adviser and use it as a checklist to refer to when reading any of their written recommendations. If you decide not to get advice make sure you fully understand the risks and benefits of transferring your pension.
If you need help choosing a pension speak to an adviser. Here are details of what information you'll get and what you need to ask yourself or an adviser.
Firms that give financial advice have to be regulated by the Financial Services Authority (FSA), the UK's financial services regulator, or be the agent of a regulated firm. Regulated firms and their agents are placed on the FSA Register and have to meet certain standards. Always make sure that the firm you use is on the FSA Register and is allowed to give advice on pensions before handing over your money.If they aren't regulated by the FSA, you won't have access to complaints and compensation procedures if things go wrong – see If things go wrong. To find out if a firm is on the FSA Register, see Check the FSA Register.
The FSA authorises advisers to give advice on personal and stakeholder pensions. But it does not regulate advice about employer's occupational pension schemes.
To help advisers give you suitable advice about your pension options, you should always tell the adviser whether your employer offers an occupational pension that you could join, or have joined.
If you go direct to a product provider, in many cases the representative will only be able to advise you on that provider's pension products. In some cases, they will have adopted products from other companies and can advise on these too, but they should tell you what the position is.
Regulated firms must only recommend products (or pensions) that are suitable for you and must give you certain information about the firm, their services and costs.
Once the adviser has decided whether a particular pension is suitable for you, he or she will then explain to you why that product has been suggested and give you this in writing. They'll also give you a Key Features Document and personal illustration which sets out important details you need to know about the pension, for example:
For more information on financial advice and finding a financial adviser get a free copy of our Getting financial advice guide. You can download or order it online – see Free printed guides
Make sure you understand what you are signing up to and that it is right for you.
Tell the adviser if your employer offers an occupational pension.
Check out the impact of charges on your pension fund.
There are different complaints procedures depending on which type of pension you have.
The Financial Services Authority (FSA), the UK's financial services regulator, has procedures that firms must follow when they deal with complaints. First contact the adviser or pension provider who sold you the pension. If they cannot resolve the dispute to your satisfaction, you can take it to the Financial Ombudsman Service. The firm will tell you how to do this – see If things go wrong.
Your employer's occupational scheme must, by law, offer a formal complaints procedure, so first contact your pensions administrator at work. If it is not resolved, you can take it to the Pensions Advisory Service who will mediate between you and the scheme to try to resolve the matter.
If that does not work, you can then take your complaint to the Pensions Ombudsman who has the power to make a decision that is binding on you and the other parties.
For more information, see If things go wrong or get a copy of our Making a complaint guide – see Free printed guides.
First take up any complaints about the handling of State Pensions with your local social security office. Look in the phone book or contact your Citizens Advice Bureau for their address.
If a stakeholder or personal pension provider has difficulties and becomes insolvent, the Financial Services Compensation Scheme (FSCS) may be able to help you. For more information visit the FSCS website – see Related links.
If your employer is winding up its occupational pension scheme, it may have a new scheme it wants members to move to. If it doesn't, the trustees have to distribute the assets according to the rules. For more information get The Pensions Advisory Service's guide Winding up a pension scheme – a guide for scheme members – see Related links.