About Pensions

The Government feel that pensions are vital for all people within the UK to begin saving for in order to provide them with a sufficient income upon retirement. They feel that people are not currently saving enough for such a time and want more individuals to open pensions either with their current employer or on their own.

It is estimated that the shortfall between what individuals should be saving for old age and what is actually being saved is around £27 billion. As a result of this, the average income for a UK adult retiring in 2008 was £18,663 which is around £5,000 less than the average income for a working adult.

But what are pensions?

Pensions are in essence a financial wrapper in which many investments can be held by an individual to save up a fund for their retirement.

There are many types of pensions available for an individual to invest in though some may only be available if you work in certain occupations such as a final salary scheme.

The idea of pensions is to provide you with an income upon retirement so that when you retire you have something to fall back on. Many people overestimate the value of the state pension provided to them and as such don’t save adequately for their retirement.

How do pensions work?

Very simply, pensions allow you to contribute an amount up to either 100% of your earnings or £3,600 (whichever is higher and with limits in some circumstances) into a registered pensions scheme and receive tax relief on the contribution up to your relevant taxable earnings threshold.

For example, if you are a lower rate tax payer and you decide to contribute £80 a month to your pension this will receive an additional 20% tax relief from the Government making the total contributions to your pension of £100.

Pensions then allow you to invest this sum into an investment of your choice (with varying limits), although usually most individuals allow the scheme to choose the fund placement for them, it is normally only SIPPs and SASSs pensions where people pick and choose the exact investments they desire.

Once your pensions investments have been allocated the fund is then allowed to grow (usually with your continued contributions) until your retirement date or date you wish to take your benefits from your selected pensions which the earliest currently stands at age 55.

No one may take benefits from their pension under this age unless special exclusions apply.

At such a time you may take up to 25% of the value of the pensions funds as a tax free cash lump sum and the remainder may either be reinvested or be used to purchase an annuity at your discretion.

The rules regarding retirement and pensions has changed recently so you may continue to hold funds in your selected pensions for as long as you desire. You no longer need to take an annuity upon retirement or by age 75.

However, you should note that although you will receive tax relief on your contributions into the pensions, apart from the 25% tax free cash lump sum you will be taxed on any income you take from your pensions at the appropriate rate of income tax.