Pensions

Pensions are tax efficient saving vehicles that are recommended by the Government for UK residents to save with in order to make sufficient savings for their retirement. Contributions to pensions receive tax relief based on your relevant tax threshold, meaning that if you are a lower tax rate payer for example and you wish to contribute £100, you will only need to contribute £80 gross as the Government will provide 20% tax relief on the amount taking it up to £100. Any contributions to your pensions can be up to the higher of 100% of your relevant UK earnings or £3,600 (limits do apply).

Traditionally when people have reached their retirement age their pensions have been used to purchase an annuity, however you may also have the option with the pensions you hold to take an income directly from them in what is known as income drawdown.

Pensions may be either personal or occupational. Personal pensions are pensions that are set up by yourself and only you contribute to. Occupational pensions (also known as group pensions) are pensions that your employer may contribute to in addition to your own contributions.

In addition, there are two main types of pensions that you may be entitled to hold: defined benefit pensions and defined contribution pensions.

Defined benefit pensions (also known as final salary pensions) are only available for occupational pensions.  These are not commonly offered pensions anymore as they are more expensive for employers to provide due to the guaranteed nature of the benefits they provide. Defined benefit pensions work by you contributing a set amount of your wage to your pensions fund which your employer will then also contribute to.

The pensions fund will then grow and continue to receive contributions up until a set retirement date whereby it will pay out a scheme pension to you. Scheme pensions work by providing you with an accrual rate based on the wage you earn during a set period against how many years you were employed for.

This will for example mean that for a defined benefits pensions fund that has an accrual rate of 1/60 that you work at a company for 30 years for you will receive 30/60 of your set wage amount each year as part of your scheme pensions payment. You may also be able to take a tax free cash lump sum amount when you first take the benefits from your pensions fund which will be based on for example 3/60 for each year of employment.

Alternatively you may invest in a defined contribution pensions fund which is the more common type of pensions scheme.

Defined contribution pensions (also known as money purchase pensions) work by you investing an amount, either lump sum or regular contributions into a pensions fund which will then grow throughout your life. When you come to take your benefits you may take up to 25% of your pensions fund as a tax free cash lump sum with the remainder either being used to purchase an annuity or to take direct income from.

Note: The above is based on our understanding of current legislation and tax rules and are subject to change by the government. Tax reliefs referred to are those currently applying. Please note the value of investments can go down in value as well as up and you may get back less than you invest.