Pension basics

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.

  • A pension plan is just a type of savings plan to help you save money for later life.
  • It has favourable tax treatment compared to other forms of savings (you can get tax relief on your contributions and the funds grow free of income and capital gains tax).
  • With a 'Defined Contribution' pension you build up a pot of money that you can then use to provide an income in retirement. The size of the pot will depend on the level of contributions and the performance of the underlying investments.
  • With a 'Defined Benefits' scheme, the employer promises an income in retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age. It is not impacted by investment returns.
  • For the vast majority of people, you can access your pensions from age 55.
Reviewing your existing pensions
  • During your life, you may become a member of various different pensions schemes.
  • It is easy to lose track of what you have and with which providers. We can help you obtain full policy information and work out what benefits you have accrued.
  • Below are some of the key things we look for when we review a Defined Contribution pension:
    - What type of pension plan is it?
    - Are there any particular benefits with this type of plan? (e.g. some older pensions have guaranteed annuity rates and enhanced tax free cash benefits)
    - What underlying funds are you currently invested in?
    - Are the funds suitable for your attitude to risk?
    - Has the fund performance been good?
    - If the fund performance has been underwhelming, what other internal funds are available?
    - What are the charges on the plan?
    - How do the plan charges compare with current products available on the market?
    - Are you paying for additional features that you don't use?
    - How can you take your pensions benefits at retirement? (e.g. through an annuity or drawdown)
Types of pensions

There are many different types of pensions plans, all with their own unique features:

1. Occupational Pensions
  • Group Personal Pensions (GPPs) - This is the most common type of pension scheme offered nowadays by employers. The scheme is run by a pension provider chosen by the employer but the pension is an individual contact between the member and the provider.
  • Final Salary Schemes (Defined benefit) - They provide members with an inflation linked income in retirement based on a proportion of the member's 'final salary'. Many schemes are closed to new business because they have been very costly for employers to fund.
  • AVC Scheme - Offered by employers to members who want to make extra voluntary contributions into their pensions.
  • Section 226 Retirement Annuity Contract (RACs) - Pre 1988 these were the only personal pension schemes available. They were commonly used by the self employed or by those not offered a work place pension. There have been no new ones set up since 1st July 1988.
  • Section 32 Buy Out - An old style of pension that were used to transfer pension benefits built up in a workplace pension to an individual policy.
  • Executive Personal Pensions Plans - These were set up by the employer for directors / key staff. They did used to have tax free cash advantages (they could exceed the normal 25% allowance) but these benefit have since been removed.
  • SSAS -These are set-up to provide retirement benefits to a small number of company directors / key staff (maximum 12 members).
2. Personal Pensions
  • Self-invested Personal Pensions (SIPPs)- They often have much wider investment powers than personal pensions. They can invest in more exotic investments like unlisted shares, commercial property and land. Some SIPPs will also members to borrow money to purchase some investments.
  • Stakeholder Pensions - These are a low cost flexible type of pension.
3. State Pension
Taking your pension benefits

The main ways to take your pension benefits are as follows:

1. Buy an annuity
  • You can choose to take 25% of your pot as a tax free lump sum and use the remaining funds to buy an income for life.
  • There are different annuity options which will influence how much income you get from your pot.
  • If you have health problems, you may qualify for 'enhanced' annuity rates.
2. Enter drawdown
  • You can choose to take 25% of your pot as a tax free lump sum or you could choose to take this gradually over time.
  • Under new 'Flexi-Access' drawdown rules there are no limits on what income you can choose to take from your pension.
  • You can stop and start your income however you like. The income is not guaranteed like an annuity so this needs to be managed carefully.
  • Unlike an annuity, the underlying funds remain invested.
3. Fully encash your whole pot
  • You could take the whole amount as cash in one go if you wish.
  • The first 25% (quarter) will be tax-free and the rest will be taxed at your highest tax rate – by adding it to the rest of your income.
  • There are many risks associated with cashing in your whole pot.