There are three main types of pension scheme. In this article we provide an over of the most common types.
The state pension
Entitlement to the state pension is built up through National Insurance contributions (or credits if you are low paid or unemployed). The amount of pension and when it can be claimed depend on date of birth and the how many years’ contributions have been paid. To calculate it, go to https://www.gov.uk/calculate-state-pension.
In 2017 a new system of single tier pensions will come in. It will treat everybody as an individual irrespective of marital status. People will require 35 years of NI contributions to claim the full pension. Those with less will get a percentage depending on how many years they have contributed.
The state pension is claimed on reaching the state retirement age. This varies between individuals at the moment but after 2020 it will be 66 for everyone and is likely to rise to 67 before 2030.
Occupational pension schemes
An occupational pension scheme is one that an organisation offers to its employees. Usually both the employer and employee pay into the scheme. Employee contributions attract tax relief. Scheme rules set out how the pension is built up and when the it can be claimed. It will also set out the various benefits that can the scheme provides.
New laws mean that by 2018 all employers must offer an occupational scheme and make a minimum contribution of 3% to an employee’s pension - should that employee chose to participate in the scheme.
Occupational schemes come in many different forms. They may be run through the organisation (trust based) or be provided for the organisation by a specialist company (contract based).
Schemes may also differ in the way they provide benefits. Defined benefit schemes provide a pension based on the employee’s salary and years of contribution. Defined contribution schemes invest the contributions to build up a sum of money which is then used to provide an income in retirement. Most public sector pensions are defined benefit whereas private sector schemes are increasingly defined contribution.
Personal pension plan
This is where the individual pays into an investment plan in order to generate a pension. Payments attract tax relief and the benefits can be accessed when the holder reaches 55.
Plans vary enormously in the charges they make, the risk level of investments and how much and when money can be paid in. It pays to take advice and shop around. Stakeholder pensions are a specific type of personal pension. They have strict rules on charges and flexibility of payments into the fund though there is a maximum annual investment limit.
Almost all personal pension plans are defined contribution. The level of retirement income will be determined by how much is paid in, how well the investments perform, the management charges incurred and how the pension pot is used to fund retirement.