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Pension terms 101

Although the New Year is the traditional time for reviewing pensions and savings, I’m raising it early to encourage workers to consider their future retirement. A recent employee poll found that 61% of staff find pensions confusing, 59% are unsure how much to save, and that 60% don’t have a specific retirement goal. Do you get confused by the pension language?

Pensions

It’s all in the name

The 3 key words to look out for are: State Pension, Defined Contribution Pension (DC) and Defined Benefit Pension (DB).

  1. State Pension is paid by the government and is a secure income for life which increases by at least the rate of inflation each year. Each worker is entitled to the State Pension by making National Insurance (NI) contributions during their working life (includes bringing up children or claiming certain benefits). The State Pension is £168.60 per week (in today’s money). Each worker needs 35 qualifying years (NI records) to receive a full stat pension or 10 qualifying NI years needed for a minimum pension.
  2. DB pension is a salary-related pension which pays out a secure income for life. Often used in the public sector or by large companies. The pension is based on how many years in the scheme and size of earnings when you retire or leave the scheme.
  3. DC pension means building a pension pot which can be drawn on, as an income when retired or after 55 years of age. Can withdraw up to 25% of the pension pot tax-free. Unlike a DB pension, the pot is dependent on investment performance and the size of contributions by the employee and employer. May be called a workplace, personal or stakeholder pension.

Don’t mention the tax

The Government gives tax relief on money put into DC pensions. If you are a basic rate taxpayer it is worth 20%, if you pay the higher rate it is worth 40% and at the top rate it is worth 45%. This means that to put £100 into your pension will only cost you £80 if you are a basic rate payer. If a non-taxpayer and paying into a pension you get 20% tax relief on the first £2,880 each tax year.

Take a deep breath, as this post can only provide the “101” understanding. Successive governments have made many pension laws, not only offering fairness, but also encouraging people to save. Sadly, it created layer upon layer of pension rules, massive complexity and a miss-selling scandal in the 1990’s. Avoid the sceptics and make the effort to get your pension ship-shape for your future retirement needs.

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Visit at www.insurewithmax.com or call the UK call centre 0333 323 0098 for more information.

Important: Before making changes to your pension, please seek advice from a recognised pension advisor or a charity that can gives pension advice.

Sources:

https://www.moneyadviceservice.org.uk/en/articles/pension-information-guide-to-the-basic-facts

https://www.theguardian.com/money/2016/may/19/uk-pensions-complicated-rule-changes

Date: 02 December 2019 by Max Robinson