The Basics about Pensions

pensions and retirement

Do you know your differences between state and occupational pensions? How about defining annuity schemes or explaining the rules for payment? If those questions have you stumped, you’re on the right page.

This brief overview explains some of the most common jargon used when talking about pensions and give you the basic facts on this type of savings. For more information on pensions, keep an eye out for more articles that we’ll publish soon dedicated to expanding on the individual points mentioned here. In the meantime, if you have any questions, just get in touch through our Contact Us page or reach out via email to

What are pensions?

Pensions help you save money to pay for your living expenses when you retire. It will be your money pool when you officially stop working. The UK government uses tax incentives to encourage you to pay into and provide your own pension instead of depending on a state pension. Such tax incentives include tax relief on contributions to a pension. Your pension savings are usually exempt from taxes and while pensions are actually considered taxable when they are paid out, some of it should be paid out as tax-free single payment.

What are State Pensions?

A state pension is a pension payment from the government to eligible people. However, it’s not that simple – there are three types of state pensions:

  • The Basic State Pension. This is a regular pension payment made by the government to eligible people who have reached the state pension age before 6 April 2016. You can calculate your state pension age here. Eligibility is decided on a variety of factors including National Insurance contributions. Since April 2018, the maximum basic state pension is £125.95 per week.
  • The State Second Pension. This type of state pension is for those who have reached the state pension age before 6 April 2016. Previously known as the State Earnings Related Pension (SERPs), it refers to the extra state pension you were allowed to grow up until 5 April 2016. This is in addition to the basic state pension. The amount depends on your income and National Insurance contributions.
  • The New State Pension. This applies to anyone who reaches state pension age on or after 6 April 2016 and it’s a flat rate state pension scheme. It pays £164.35 per week.

How About Stakeholder and Personal Pensions?

  • Personal Pension. In a brief summary, this is a type of plan to save money for your retirement. In contrast to an occupational pension that is set up at your place of work, a personal pension plan is one you do yourself through a pension provider of your choice (typically a bank, insurance company or building society) and then you invest in it yourself. Personal pension contributions are subject to tax relief; for example, you pay contributions net of basic rate tax.
  • Stakeholder Pension. Available to both those who earn an income and those who don’t, stakeholder pensions is a type of defined contribution personal pension. They have certain features such as capped charges and low, flexible minimum contributions.

How About Retirement Annuity Schemes?

A retirement annuity scheme or policy is the name given to personal pensions taken out before 1 July 1988. The key difference between a retirement annuity scheme or policy and a personal pension is that retirement annuity policies can pay out bigger tax-free lump payments that a personal pension.

Let’s Move on to Occupational Pensions

Otherwise know as a works pension, occupational pensions are set up and paid through your workplace. Once a regular benefit, occupational pensions are not as common as they once were and are often not available to new employees. You may be offered a group personal pension rather than the occupational pension.

Pension Payment Rules

There are certain rules to paying into a pension and for specific terms and conditions, check with your pension provider. You can usually pay as much as you want into your pension; the rules tend to be centered around how much you can take out in one go and when. If you take out your pension earlier than agreed, you may need to pay a penalty.

How About Tax Relief on Contributions?

As we mentioned before, the UK government encourages people to pay into their own personal pension rather than depending on a state pension. An incentive to do this is tax relief on contributions. If you are a UK taxpayer, you can get tax relief on contributions of up to 100% – depending on annual allowance.

What is annual allowance? It’s the limit on the total amount that you can pay into your pension policy each while still receiving tax relief. The current cap is at £40,000. If you exceed this figure, you won’t get tax relief on any savings that exceed this number and on top of that, you’ll have to pay a annual allowance charge. In addition to the annual allowance, there is also the lifetime allowance. This is capped at £1,030,000 and if your pension savings goes beyond this limit, you will be taxed on the excess.

How does the tax relief work? You pay X amount that is considered the net of basic rate tax. The government pays the remaining 20%. To make that clearer, let’s suppose you want to put £100 into your pension. You will only need to put in £80 as the government will pay the remaining £20. This can vary depending on your income (and which tax bracket you are in) and if you are a non-taxpayer.



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