What is a pension scheme?
In simple terms, a pension scheme is just a type of savings plan to help you save money for later life. It also has favourable tax treatment compared to other forms of savings.
A long term savings plan
It makes sense to put some money away for when you’re older and that’s what pension schemes help you do. You save a little of your income regularly during your working life so you can have an income in later life, when you want to work less or retire.
There are several types of pension schemes. Some may be run by your employer, others you can set up by yourself. And saving into one scheme doesn’t mean you can’t save into another or use other tax-efficient savings plans like ISAs.
When the time comes for you to start enjoying your pension, there will be several options available to you. These may include being able to take a tax-free cash sum and the added security of being able to receive a regular income.
What’s the difference between a pension scheme and the State Pension?
A pension scheme is designed to provide you with income in addition to the State Pension. The single tier State Pension provides up to £179.60 a week, although you may have some additional protected payment as well. If you would want more income than this, saving into a pension scheme makes sense.
How do I know the amount of pension I will get?
It depends. If you have a defined benefit pension scheme, you will receive a specified level of income that is worked out according to factors such as your final pensionable salary and years of pensionable service.
If you have a defined contribution pension scheme, you build up your own pot of money. The value of this pot can go up or down but over the long term, pension savings usually grow and you can benefit from a number of tax advantages. When you come to retire the amount of income you receive will depend on how much it costs to buy a pension at that time.
Is it too late for me to start saving into a pension?
No matter how old you are, there is always a value in saving into a pension scheme, particularly if your employer is also willing to contribute. Also, it’s a tax-efficient way of saving money and you may be able to take some or all you save as a cash lump sum.
What if I die before I take my pension benefits?
In most cases, your pension scheme will provide benefits on your death. If you’re in a defined benefit pension scheme, there may be an income payable to your dependant. If you’re still an active member of that scheme, then there will probably also be a lump sum payment made to your dependants which is often a multiple of your pensionable salary. You should check with your scheme’s administrator to check what death benefits may be payable.
If you’re in a defined contribution scheme, it may be possible that a lump sum will be paid to your dependants. The lump sum is normally the value of your fund. Again, it’s best to check with your scheme’s administrator or pension provider to find out what death benefits may be payable to them.
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.