An introduction to pensions

Employees are automatically enrolled in the scheme, as long as their employment status meets the qualifying criteria. You will make regular, automatic contributions to your pension that will typically come out of your wage. Your employer will then match your contribution, or a percentage of it.

When you change jobs, the pension you’ve accumulated becomes ‘frozen’ but will still be available to you when you retire – however, you may not qualify for all of the benefits if you have switched pension providers. Pensions can also be consolidated with one another if you change jobs, but you should consider speaking to a financial adviser first as it can be a complex process.

A defined benefit plan is a pension scheme where your employer agrees to pay you a set amount of money when you retire. The amount will be based on your length of time with the company, your salary history and your age. These schemes are largely historic now, only offered by a handful of employers (usually public sector).

Steve is 28. His employer matches his monthly pension contribution of 10%, based on total salary, which makes his overall contribution 20%. The contributions are taken before Income Tax and National Insurance.

This month, Steve earned £2,100. To work out Steve’s monthly pension contribution, he calculated 20% of £2,100, which equals £420. However, only £210 (10% of his total salary) is from Steve’s salary; his employer contributed the remaining £210.

Note that bonuses are often not included in pension calculations, only base salary. Speak to your employer to find out how bonuses affect your exact pension contributions.

The State Pension is a pension paid to you from the government when you reach state retirement age. The State Pension changed on 6 April 2016 for people who reach State Pension age from then onwards. To receive the full new State Pension, you need 35 qualifying years of National Insurance contributions. If you have fewer than 35 qualifying years, you will receive a reduced state pension.

The official gov.uk website is home to all the information you need about State Pensions, including when you are eligible to claim yours.

A personal pension is a specialised savings account you can set up to help you financially prepare for retirement. They are often referred to as ‘defined contribution’ or ‘money-purchase’ schemes. A defined contribution pension is based on how much you have contributed to, as well as the growth of, your pension.

The money you contribute to your pension will be invested in a range of assets, organised by a fund manager. These can be:

• Cash
• Bonds
• Stocks and shares
• Property

A personal pension is a popular option for people who may not have access to a workplace pension, such as if you are self-employed or if you are not currently in work but want to begin saving. People other than yourself may contribute to your defined contribution pension, such as your employer or your partner. Parents may also want to contribute to their child’s pension.

You can access the money in your personal pension once you are 55, increasing to 57 in 2028, however this may change depending on your pension provider. 

Defined contribution pensions offer several options when it comes to taking your money out. You can:

• Cash in the whole amount
• Combine your pension pots (this can be done at any point, not just on withdrawal)
• Take a lump sum
• Invest in a pension annuity
• Take a flexible income via drawdown
• Keep your money invested in the pension and take it out when you need it

Depending on the terms and conditions of your individual pension, you could choose to combine one or more of these options.

Personal pensions are also subject to tax relief, which means you’ll receive a certain percentage of your pension tax-free.

Typically, 25% of your pension is tax-free and the rest will be subject to standard income tax. 

Workplace pensions are those offered by your employer. By law, your employer must offer you a pension. They are subject to tax relief, so you can access part of your workplace pension tax-free.

There are two different types of tax relief available for workplace pensions. A ‘net pay’ arrangement means your contribution is taken before tax is deducted. A ‘relief at source’ arrangement means Income Tax and National Insurance will be deducted before your pension contribution is calculated.  

Your pension scheme provider will claim the tax back from the Government at the basic rate of 20%, which is then added to your pension.

You will still be able to access your pensions from all of your previous employers once you retire, but you may not qualify for all the benefits if you have switched pension providers. 

The two main types of workplace pensions are:

• Defined benefit
• Defined contribution

Employees are automatically enrolled in the scheme, as long as their employment status meets the qualifying criteria. You will make regular, automatic contributions to your pension that will typically come out of your wage. Your employer will then match your contribution, or a percentage of it.

These pensions currently benefit from 20% tax relief. This may differ for higher earners, who will need to contact HMRC to find out their tax relief based on their salary and contributions.

A defined benefit plan is a pension scheme where your employer agrees to pay you a set amount of money when you retire. The amount will be based on your length of time with the company, your salary history and your age.

This differs from a defined contribution pension plan, which takes regular contributions from you, your employer, or both. These schemes are largely historic now and only used by a handful of employers (usually public sector).