Building your pension fund is vital for retirement especially if you want to avoid relying on short-term loans like payday loans later in life. Here is a quick guide to UK pensions.
1. State pension
Most people in the UK get some state pension. This type of pension is paid by the state or government. You gain entitlement to a state pension if you have been making national insurance contributions partly or throughout your working life. State pension offers the pensioner a secure source of income for life. The pension usually increases on a yearly basis based on the inflation rate. Although state pension meant is for individuals who have been working and contributing, you can qualify for the pension if you claim certain benefits or when you are bringing up children.
Since April 2016, the UK state pension was set to a flat rate. For the 2018/2019 tax year, the flat rate is £164.35 a week. However, a person can qualify for more if they are entitled to additional state pension. The entitlement is subject to the previous system (before April 2016). A person can also receive less when they are “contracted out” of additional state pension.
To qualify for full state pension, you require 35-years national insurance (NI) record. To be eligible for any state pension, you require at least 10 years on your NI record.
You can claim state pension when you are just about to reach state pension age (4 months before). You can check your state pension age here: https://www.gov.uk/state-pension-age.
You can also defer your pension by doing nothing. If you don’t claim state pension, it stays intact until you claim. The pension increases by 1% every 9 weeks you defer or approximately 5.8% per year. The increase is paid together with regular pension payments when you claim.
2. Defined benefit pension
If you have been working for a large organization or for the government/public sector, you most likely have a DB pension. Defined benefit pension is salary- related. The pension pays a secure income for a lifetime which increases every year. The amount of money you get in a DB pension is dictated by factors such as years you have contributed to the scheme as well as your salary during that period. In regards to salary, the pension calculation can consider the average career pay or your pay at retirement.
You can claim your DB pension when you attain the normal retirement age (65 years) or earlier depending on the type of scheme although this may reduce the amount you get significantly.
When you claim your pension, you can take a portion tax-free. The pension scheme rules dictate the amount you take although you can take approximately 25% of the total pension benefits as a tax-free sum. As mentioned above, claiming can reduce the amount you receive significantly so if you must claim, it is recommendable to claim a lower amount.
You can also transfer your DB pension to a scheme that allows you more flexible access. Although this option is ideal when you want to access the pension sum at will to avoid taking out short-term loans like payday loans during emergencies, you give up some benefits by choosing this option.
You should speak to an FCA regulated financial adviser before making such a decision since some pension schemes may be scams.
3. Defined contribution pension
This type of pension scheme is built up after which a retirement income is drawn. The pension amount is dictated by how your investments perform, the charges you pay as well as the amount you/your employer contributes. Personal, workplace and stakeholder pension schemes are part of defined contribution pensions.
You can what you like with your defined contribution pension after reaching 55 years old. However, it is better to let your pension amount build up for you to have more money to spend during retirement. You should contribute optimally and allow your pension to build up until you retire.
The above guide summarises UK pension basics. Understanding the types of pensions and your choices among other information is important when you want to make better decisions for your retirement. Planning for the future early can help you avoid short-term loan problems which are common in the UK today. To learn more about pensions, you can seek financial advice from FCA-registered financial advisers like https://www.moneyadviceservice.org.uk who offer free retirement planning advice.
Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.