An overview of pension types
There are many different types of pensions, for example Final Salary and Money Purchase Schemes. Some key features of a pension include:
- A tax-efficient way of saving for retirement
- Tax relief available on contributions up to 100% of your relevant earnings or £3,600 if you have no earnings (capped at the Annual Allowance)
- Both employed, self-employed or the unemployed can contribute to a pension
- Wide choice of investment funds
- In most cases you can transfer and consolidate your plans to alternative providers at any time
- Choice of options when you reach retirement – Pension Drawdown or Annuity
This is the process of saving in a recognised Pension Plan for the benefits that you will need in your retirement.
Money Purchase or Defined Contribution plans: For the majority of individual plans the amount of your benefits is governed by the value of your pension fund(s) at the time of your retirement. This is determined by the amount that you have contributed and the investment performance that has been achieved.
Final Salary or Defined Benefit Plans: The other major category is plans/scheme based on your Final Salary, where your benefits are determined by your earnings at retirement and your length of service. These schemes are generally offered by large companies and the Government but they have been reducing in recent years because of their high cost.
You can have as many pension plans as you wish, which could comprise of both occupational pension schemes and personal arrangements. There are certain limits on how much you can pay in and get tax relief on. Your yearly limit is known as your annual allowance and the total amount you can pay into your pension is known as a Lifetime allowance.
Annual Allowance: Refers to the amount of contributions you make in any one year. This is set by HM Revenue & Customs and the limit for 2017/18 is £40,000
Lifetime Allowance: Refers to the total value of your fund, there are possible tax penalties if your total fund exceeds it. The Limit for 2017/18 is £1m
Pension plans provide a very tax efficient means of saving for your retirement. (Based upon current legislation, tax rules may be subject to change at any time).
Pension Transfers & Consolidation
You can transfer SIPPs, personal pensions and most workplace pensions, so long as you haven’t started to take income from them – known as ‘draw down’. Depending on your circumstances, there may be many good reasons why consolidating from one plan to another can be a good idea. For example, save money, charges on one plan may be lower than another; have access to a wider range of funds which are better suited to your needs; modern pension schemes can offer a number of facilities such as on line access that can help you track and manage your investments in real time; save time, dealing with fewer pension providers can save valuable time when you want to make changes.
It is possible to transfer most types of pension plans including:
- Money Purchase Occupational schemes.
- Final Salary Schemes (except Civil Service Schemes such as NHS, Police, Armed Forces etc)
- Self Invested Personal Pensions
- Stakeholder Pensions
- Personal Pensions
- Group Personal Pensions
- Scheme Pensions
- Retirement Annuity Contracts (RACs)
- Additional Voluntary Contributions (AVCs)
- Free Standing AVCs (FSAVC)
- NEST Pensions
If you want to learn more about the different types of Pension Plans or Pension Transfers & Consolidation opportunities why not contact us or go to the Pension Professor to find our more?
Please note that we are only providing information within these web pages to help you decide what to do, we are not recommending that a transfer is the right thing for you. It is important that you understand the differences between your old and new plans and there will be other factors that affect your decision to transfer. It is important that you make an informed decision so if you are considering a transfer, we strongly recommend that you seek independent financial advice before taking action.
A PENSION IS A LONG TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND ON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION