The world of UK pension schemes can be incredibly overwhelming, especially if you’re unsure about what it is that you need, or which type of scheme can suit you best. Which is why we are here to help!
There are two main types of schemes. Final salary, and far more common nowadays, Defined contribution. A defined contribution pension is essentially a pot of money that you and your employer can pay into. Then, at retirement, you can draw money from your pension pot or exchange the cash with an insurance company for a regular income until death, called an annuity.
Since 2015, from the age of 55, you’ve been able to access your pension plan more flexibly, taking as much or as little cash as you like, whenever you like. It’s worth noting the Government’s said this will rise to age 57 in 2028, so this could have an impact on your pension planning.
A final salary scheme conversely pays an income for life, based on your final salary, length of service, and the accrual rates set by the scheme. The pension will become payable at the scheme’s normal retirement date which is typically age 60 or 65.
Is there a Need for Private Pensions UK?
Most UK residents and UK domiciled individuals are entitled to the UK State Pension if they have paid National Insurance contributions for more than ten years. In order to receive the full state pension, you will need to make 35 years’ worth of contributions.
The UK State Pension is a regular payment from the government that is supposed to see you through your final years. However, you have very little control or flexibility over the payments and the amount you receive will depend on your contributions.
Many people are reluctant to rely solely on the state pension, as they do not believe it will be enough for them to live comfortably. In this case, a private pension can be a great addition to your retirement income.
Defined Contribution Pensions vs Defined Benefit/ Final Salary Pensions
The value of a defined contribution pension depends on how much money you and or your employer have placed into it during the lifetime of your scheme. It can be a personal or workplace pension.
A defined benefit pension value is based on your final salary and the length of time you have been working for your employer. Final Salary schemes are being phased out and many have closed or are closed to new members. Final salary schemes come with guaranteed benefits, and will automatically include annual increases, paying you an income for your lifetime. They will also typically provide a spouse’s pension, normally equal to 50% of the pensionable amount. If a guaranteed income is important to you, a final salary scheme can be very beneficial.
Conversely, a defined contribution plan does not pay a guaranteed pension for life but rather you can choose how much and when to withdraw funds from your pot. They are more flexible than final salary schemes, with greater options in relation to death benefits.
How to Choose a Pension in the UK
There are a variety of personal UK pension schemes. These include:
Executive Pension Plans: These workplace pension plans tend to be exclusive to key employees within a workplace, offering various tax benefits. There are limits to the amounts that can be placed into this type of scheme.
Group Personal Pensions: In an effort to ease admin, group personal pensions can be set up for various members of the workplace. They are set-up by one pension provider but can follow the employee to any new jobs within their lifetime.
Master Trust Pensions: This workplace pension is set up to benefit multiple employees who are not necessarily related by role or company. It is more flexible than other schemes and has relatively low charges.
SIPP: This is a Self-Invested Personal Pension that gives you maximum flexibility over your investments. You choose where your money is invested. They are portable and often used by international workers who want to remain in a UK scheme.
SSAS: A Small Self-Administered Scheme is usually set-up by the company that you work for and is most popular amongst small and family-run businesses. It is a type of defined contribution pension that an employer can self-manage for less than 12 members. Typically a SSAS pension scheme is set up by the directors of a business to gain more control over how their pensions are invested.
Stakeholder Pension: A stakeholder pension is a great choice for the self-employed or those who wish to have a pension separately from their employer. Your final pension pot will depend on how much you pay in and how your investments perform.
Final Salary/Defined Benefit: You cannot specifically choose to become a member of a final salary scheme. Your employer needs to offer you the option to become a member of the scheme. However, as most of these are closed to new members, they are rarely available.
All private pensions UK come with a variety of benefits, pros, cons and risks, and what works for one person won’t necessarily be suited to the next.
It is a great idea to seek advice before selecting a pension, to ensure you get the best fit for you.
Your pension is an asset, just like your home, and other investments. So, when you die, you’ll want to make sure that your family and loved ones are able to make use of anything that you have left in your pension pot.
Published On: May 3, 2022|3.5 min read|
Pension Transfer Values in 2022
Record numbers of people have been transferring out of their defined benefit pension schemes in exchange for a fixed pot of money known as the CETV, or cash equivalent transfer value. But more recently values have, in some cases been declining slightly. So what’s in store for pension transfer values in 2022.
Published On: April 5, 2022|2.8 min read|
How Your Pension Can Help Mitigate Inheritance Tax
Inheritance tax can seem like a particularly cruel charge at a time of grief. There are ways of reducing the tax burden, however, and a pension can play an important part in that.
Get our latest financial blogs and articles straight to you inbox.
In partnership with
In partnership with AES Financial Services Ltd which is Authorised and Regulated by the Financial Conduct Authority under registration number 464494. You can check this on the Financial Services Register at http://register.fca.org.uk.
AES Financial Services Ltd (“AESFSL”), trading as AES International, is registered in England no. 06063185, its registered office being at 7 Bell Yard, London, WC2A 2JR