Types of pensions


There are 3 main categories of pensions:

 

State

Occupational

Individual
(Personal / Stakeholder etc)

Paid from age 65 for men and 60 for women (rising to 65 by November 2018). A basic weekly pension of £102.15 (requiring 30 years of qualifying National Insurance contributions) is paid to you.

A possible extra 'State Second Pension' (S2P) based on your earnings over your working life may also be available to you.

A pension provided by your employer in one of the following two forms:

Final Salary Scheme:
Provides an income based on your salary and the number of years you've worked for the company.

Money Purchase Scheme:
A
 combination of contributions from both you and the employer to buy an annuity at retirement.

These pensions are available to everyone, but especially important for the self-employed.

You invest money in your pension (often via 'funds') and use this to provide an income when you retire.

The extent of investment choice depends on the type of pension you choose.

 

The sub-categories of Individual pensions

 

Stakeholder

Personal

Retirement Accounts

Self-invested (SIPP)

Straightforward and cost effective. Only an annual charge applies, which must be no more than 1.5% a year over the first 10 years then 1% thereafter. There are usually about  20-40 funds to choose from, which should be adequate for most. 

 

Traditional 'personal' pensions usually offer more investment choice than stakeholder, but at a higher cost. You might have up to several hundred funds to choose from, but expect both initial and annual charges.

 

These are new-style Personal Pensions that offer some of the more sophisticated facilities that SIPPs offer.

Offers the widest investment choice, usually over a thousand funds as well as shares, investment trusts and exchange traded funds. The lowest cost SIPPs tend to be cheaper than personal pensions but more expensive than stakeholder.


What are the alternatives?

Popular alternatives to using a pension for providing retirement income include:

 

ISAs

Equity release

Property

Allow you to hold a mix of investments or cash within a beneficial tax wrapper. Although there's no tax relief on contributions, income is tax free. Unlike a pension there's no restriction on when and how you can access your money.Click here to visit our ISA section.

If you own your home or its value is greater than your mortgage, you could release some of this value to provide a retirement income. This is usually achieved by either downsizing your home or using a special type of mortgage.

Rental income from a second home can be a good long term source of income. However, it's inflexible and you could face a big capital gains tax bill if you sell.

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