A pension is a form of investment or savings plan designed to provide you with an income to live on when you retire. There are many different types of pension arrangements available, from state pension schemes offering limited financial support in old age to private pension plans giving you the freedom to build a larger fund for your retirement. Even if your initial contribution is small, whatever you can put aside in the early years will be vitally important for getting your pension growing to avoid a poor income in retirement.
Additional Voluntary Contributions (AVC)
As a member of an Occupational Pension Scheme, payments in the form of Additional Voluntary Contributions can be made above the normal level of contribution to gain additional pension benefits.
Personal or Private Pensions
A personal pension is usually arranged by yourself, not your employer, and is a type of money purchase plan.
A personal or private pension is a tax-efficient savings plan that enables you to save for retirement. Your pension contributions attract tax relief (up to annual limits) and can be made in various ways: regularly, by lump sum, or a combination of both.
On retirement, up to 25% of your pension fund value can be taken as a tax-free cash lump sum. The remainder of the funds left in your pension pot can then be used to buy an annuity (a guaranteed income for life in return for a lump sum investment) or left invested to produce an income directly from the fund via a drawdown arrangement. Alternatively, you can withdraw the whole fund as a taxable lump sum.
Company or Workplace Pension Scheme
A Company Pension Scheme (otherwise known as a Workplace or Occupational Pension) is a pension that is set up by your employer to provide retirement benefits to you while you are employed by them. It allows you to accumulate a pension fund during your working life. You will usually be required to make regular pension contributions based on a percentage of your salary into the workplace pension scheme. Most people are now automatically enrolled into a workplace pension (unless they have opted out). Both the employer and the employee pay money into a pension which is topped up by tax relief on the employee's contribution. These also are usually a type of money purchase arrangement.
Final Salary Pension Scheme
A Final Salary (or Defined Benefit) scheme is a type of occupational pension where the amount of retirement income is based on your final salary. These are becoming less common in the private sector, but are still in force in the public sector.
Money Purchase Pension Plan
A Money Purchase Pension Plan or Defined Contribution Plan is a pension scheme where the final benefits are not linked directly to your salary. You (and maybe your employer) pay regular contributions into your pension pot. Upon retirement, the total pool of capital in your pot can be used to take an income in retirement. The amount in each money purchase plan member's account will differ from one member to the next, depending on the level of contributions and investment return earned on such contributions. All pensions other than final salary pensions and the State Pension are a form of money purchase plan.
Self-Invested Personal Pension (SIPP)
A Self-Invested Personal Pension (SIPP) is a type of personal pension. A SIPP is a pension plan that gives you the freedom and control to totally manage your own investment decisions by buying stocks and shares and a range of other types of assets. Any contributions that you make to a SIPP will receive tax relief, up to certain limits.
Small Self-Administered Scheme (SSAS)
Small Self-Administered Schemes (SSASs) are generally very bespoke pension schemes designed for the directors of a business. They are generally not available to other employees as they are more complex and limited to no more than 11 members.
A stakeholder pension is a form of personal pension, in that you pay money into your pension to build your pension fund. However, these plans have to adhere to Government rules and minimum standards on annual management charges, access and terms to ensure they offer value for money, flexibility and security.
A state pension is also known as a Government Pension or Old Age Pension. Your entitlement to the pension accumulates during your lifetime and is paid by the Government when you reach state pension age, which depends on your date of birth.
A state pension value is based on the number of years of National Insurance (NI) contributions made throughout the person's working life. You have to have at least 35 qualifying years' worth of NI contributions to qualify for a full state pension.
If you are 55 or over and own your own home, you could consider using equity release to significantly boost your retirement income. You can normally release up to 40% of the value of your home and continue to live there, usually without having to make any repayments.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.