What is a Pension?

Pensions are an important part of our lives. We all know that pensions are important.

Retirement may seem far-fetched for many Koody readers. It’s important to plan now to enjoy your retirement years comfortably.

This article will help you navigate to the relevant sections of the website. It will also help you understand how UK pensions work.

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What is a pension?

A pension is a savings account that you can contribute to during your working life and spend when you retire.

Your pension provider will usually invest your pension money in shares and stocks. You won’t normally access the money until you turn 55 (which increases to 57 in 2028).

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Different types of pensions

There are two types: defined benefit and defined contributor pensions.

The defined contribution pension is the most relevant type of pension for our generation. A defined contribution pension requires us to create our pension pots. This will provide an income source for retirement.

A defined benefit plan promises a fixed income at retirement. However, a defined contribution pension will offer a more flexible option. The amount you might receive from a defined contributor pension is dependent on how much you contribute over your lifetime, how your investments perform and what lifestyle you choose for retirement.

Pension Annual Allowance

You can save as much money as you want into your pension every year but you will be subject to tax if you do:

  1. You can contribute more than PS40,000 per year. This is your annual allowance. You can carry any allowance that you don’t use for up to three consecutive years.
  2. You can contribute more than 100% to your earnings within a single year.
  3. Your lifetime allowance can be exceeded – PS1,073,100

Retiree Pension Contributions are exempt from tax

In the form of tax relief, the government will increase your pension contributions.

You can get an additional PS20 for every PS80 that you contribute to your pension if you are a higher-earner.

Tax relief can be described as a refund for the tax you originally paid on your pension contribution at your normal income tax rate, which is 20%, 40% or 45%.

Your pension provider is the one who applies for this tax relief at your basic rate and adds it into your pension. You will need to claim the additional rebate if you are a taxpayer at a higher tax rate.

How to contribute to your pension

  1. Auto-enrolment and workplace pension
  2. Personal pension
  3. State pension
  4. Lifetime ISA
  5. Self-employed pension

Auto-enrolment and workplace pensionYour employer usually arranges a workplace pension. This is a way to save for retirement. If you meet the minimum requirements, your employer will enroll you in their workplace pension plan when you start a new job.

After you have been enrolled, you and your employer must contribute a portion of your salary to a workplace pension plan.

Your employer must contribute a minimum of 3% to your pension. Your employer and you must contribute 8% to your pension.

Personal pension

You can arrange private pensions.

A personal pension is a great way to save for retirement if you don’t have an employer pension. Even if you have a workplace pension, your pension can help you grow your retirement savings quicker.

There are two types of personal retirements: self-invested personal pensions (SIPPs), and stakeholder pensions.

State pension

You are eligible to the State Pension in addition to your personal and work pensions. This is money that the government gives you for free, and it is determined solely by your National Insurance record.

When you reach the State pension age, you will be earliest eligible for the State Pension. Your State Pension age is likely to be 68 if you are between 20-39 years old. You can double-check this number.

Lifetime Isa

A Lifetime ISA is another way to save for a retirement. The Lifetime ISA is available to anyone aged 39 and younger. It allows you to save up to PS4,000 per year towards your first home, or retirement. Your savings will be boosted by 25% every year, up to a maximum PS1,000.

Self-employed pension

You will not automatically be enrolled in a pension if you are self-employed, a sole-founder, or a company’s sole director without any employees.

You are responsible for arranging your pensions. This should not be a concern. It is easy to create a pension plan and transfer money to it.

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