As people are living longer, it is essential to ensure financial stability in later life. A pension is a long-term savings plan which offers you the ability to save efficiently throughout your working life for retirement.
Various types of pension schemes exist which each offer numerous benefits, providing a safe and reliable means to achieve financial security in retirement.
The state provides a pension in retirement, but most people will need to save money on top of this to enjoy the same standard of living in retirement as they had while they were working.
Pension schemes are available through your employer and come in two types: defined benefit and defined contribution schemes. In a defined benefit scheme, your pension is based on your salary and the number of years you have worked, with payments paid as a fixed income for life.
In a defined contribution scheme, your regular contributions are invested and grow throughout your career, providing you with a pot that can be converted into an income during retirement.
If you are self-employed or are not working, you can set up your own personal pension where regular contributions are invested and grow over time to provide income when you retire.pad
FAQs
How are pensions taxed?
UK pensions are taxed using the “exempt, exempt, taxed” model. Employer and employee contributions and the pension savings growth are exempt from taxation. You are required to pay tax on pension payments, but you can withdraw 25% of your pension pot tax-free.
How much will my employer contribute to my pension?
Under automatic enrolment, the minimum employer contribution into a pension is 3% of qualifying earnings, with employees contributing 5%. However, depending on your pension scheme, employer contributions could be greater.
When can I access my pension?
Pension freedoms allow people aged 55 and over to take money out from their defined contribution pension. From April 2028, the minimum age will rise to 57. Defined benefit pensions usually allow you to start accessing your savings from the age of 60 or 65.
