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Pension Basics

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.

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.

Different UK Pension schemes

There are many different types of UK Pension schemes in existence today. While the aim of each is to provide you with an income in retirement, they work in different ways.

Finding out what type of pension you have

Firstly, if you’re a member of a pension scheme (or have been a member of a pension scheme in the past), it’s important to check

  • which type of scheme you belong to;
  • your obligations (and those of your employer, if applicable);
  • the benefits that the scheme may provide; and
  • when you may be eligible to receive them.

Some pension schemes are provided by employers, these are often called workplace pensions or workplace pension schemes. Other pension schemes can be taken out by you, or you and your employer together. It’s even possible for someone else to set up a pension scheme for you. For example, a parent can now set up a pension scheme for a child. While some schemes will need you to pay in, others may be paid for just by your employer.

The below items look at different circumstances and how this might affect you and your pension benefits.

If you’ve been a member of multiple pension schemes

If you’ve had more than one job in your working life, you’ve probably been a member of more than one pension scheme and each one may provide you with benefits when you retire. When you change jobs, you don’t usually lose your pension benefits. And when you joined each scheme, you should have been given a pack outlining the details of the scheme. You should also have received an annual statement, or Illustration of Retirement Benefits, from the pension provider.

However, sometimes people forget to let update their personal details with pension schemes. If you haven’t been receiving communications, this could be because they don’t have your correct contact details. So make sure you check that each scheme knows how to contact you, especially if you have moved house since you joined.

If you do have multiple pension pots, you may want to investigate whether it’s possible, and worthwhile, to combine them. Combining your pension pots can help you keep track of each one and, when you start to receive benefits, make your life easier as you could then receive payments from a single source rather than several smaller payments from different sources.

If you’ve been a member of a pension scheme before, but can’t locate your pension

Sometimes people don’t stay with the same employer for very long. If you were only a member of the pension scheme for a short time, you may have been offered a refund of the contributions you made to the scheme.

It’s also possible that the scheme you belonged to may have moved, or changed its name – if you have ‘lost’ track of your pension details, we will help you to find the current contact details as part of our service.

If you have changed jobs, it’s likely that you may have been offered the opportunity to transfer your old pension to your new employer’s scheme or to a ‘private’ pension. If you transfer, the new scheme is responsible for providing your benefits on behalf of both schemes.

If you’ve worked abroad

If you decided to spend your working life abroad, you may have built up benefits under a foreign (or overseas) pension scheme. Again, you should consider taking regulated financial advice to see whether it may be possible to combine these with other pension scheme benefits.

Contract-based schemes

Contract-based schemes are provided by insurance companies and other pension providers. They’re effectively a contract between you and the pension provider.

How contract-based pension schemes work

Contract-based pension schemes are individual contracts between you the member, and the pension provider. The pension provider is often an insurance company or an investment platform, although there are also a number of independent providers.

Some contract-based pensions may be offered by employers and, although it may look similar to an employer-sponsored workplace pension, the pension will remain an individual contract between you and the pension provider. Examples include:

Contract-based pensions are money purchase schemes. The value of your retirement benefits are determined by the amount of contributions that have been made, the period that each contribution has been invested, and the investment growth over this period less charges.

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