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Pensions basics

How does a pension scheme work?

Pension schemes are different. How yours will work depends on whether it’s a defined benefit or defined contribution scheme and the rules of the scheme.

Defined benefit pension schemes

If you have a defined benefit pension scheme, you’ll get a specified income when you reach the scheme’s retirement age. This income is worked out using a formula that takes into account your salary and length of service. You may have to pay contributions to the scheme but your employer will also pay contributions on your behalf. Your scheme administrator can explain the details of your particular scheme.


Defined contribution pension schemes

If you have a defined contribution scheme, what you get when you retire is not specified in advance. Instead you build up your own pot of money. You (and your employer if it’s a workplace pension scheme) pay into your pot each month and this money is invested. So the final value of your pot will depend on the amount paid in, the charges and the performance of the investments.


Automatic enrolment

Automatic enrolment is a Government initiative that obliges all employers to enrol eligible employees into a workplace pension, provided they are not already in one. Employers also have to pay a minimum contribution into the pension scheme for their eligible workers.

Automatic enrolment started in October 2012 and is being phased in over several years. So if you have not already been automatically enrolled into your employer’s scheme, this doesn’t necessarily mean you aren’t eligible.

You are eligible for automatic enrolment if you:

  • Are at least 22 years old;
  • Have not reached State Pension age;
  • Earn more than a minimum amount a year (currently £10,000); and
  • Work, or ordinarily work, in the UK (under a contract).

Click here to read more about automatic enrolment.


Frequently asked...

What tax relief do I get on my pension contributions?

Tax-relief is a key benefit of paying into a pension scheme. If you have a workplace pension scheme (defined benefit or defined contribution), what you pay in is taken from your salary before tax.  This means that you pay less income tax as you only pay tax on what is left. If you’re self-employed or have your own private pension, the government pays your tax saving into your scheme, so you get more money in your pot. If you’re a higher rate tax payer you can claim tax relief over the basic rate using your tax return.

I am over 55 years old – is it worth me being automatically enrolled?

Even if you’re relatively near your ideal retirement age, you can still benefit from staying in a workplace pension, securing an employer contribution and tax relief.  When you reach your date of retirement you can feel reassured, that any pension pot you build up can usually be taken either in part or in its entirety as cash.  

Is there a limit on how much I can pay into a pension scheme?

No.  However there is a limit on the amount you can pay in that is eligible for tax relief. Click here for more details about tax relief.

Where can I find out more?

If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.

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