Pensions Guide

Learn about Pensions, the types, the terms, the risks and how to plan for your retirement.

Pensions Guide

What is a Pension?

A pension plan is effectively a long term saving plan, which, in theory, cannot be touched until you reach retirement.

It is unique in that it can be contributed to be yourself and/or your employer and contributions are subject to tax relief - which is to say, depending upon the type of pension scheme you are in, your contributions are topped up by the Government at your equivalent tax rate.

When you reach retirement you have a certain amount of money you can withdraw from the accrued pension tax free (25%) with the remainder (75%) being used to purchase an annuity that gives you an income throughout retirement. The level of income you receive will be proportional to the amount of money you have accrued in your pension in order to purchase the annuity.

How your pay affects your pension?

If you pay a set percentage of your monthly income into your pension, any pay increase will have a direct effect on your contributions - as well as a greater tax saving. However, if your pay is reduced, or you are out of work for a period of time, this will effect your pension too - whether you stop contributions of reduce contributions will depend on your household budget.

I don't currently have a pension plan

New rules introduced last year mean soon it is now a requirement for people to have some form of retirement planning - in other words, you will be automatically put into a work related pension scheme if you don't make any pension contributions at the moment.

The Government is attempting to address the very real problem of poor retirement planning with less than 30% of people bothering at all.

You can opt out of your employers scheme, but it is a revolving scheme so every three years you will automatically be enrolled again if you haven't by then.

Your pension and tax relief

Pension relief is basically an amount of tax you save, or are refunded, depending upon your income level and the amount you contribute to your pension.

The amount of relief is subject to limits on the amount of contributions you make.

For example, assuming the amount of your contributions is entirely within each of the tax bands stated:

  • Basic rate taxpayer - If your contribution is £80, then the Government will gross this up by 20% to £100 - so effectively refunding you £20 in tax and putting it into your pension fund.
  • Higher rate taxpayer - If your contribution is £80, then the Government will gross this up by 40% to £133 - so effectively refunding you £53 in tax and putting it into your pension fund.
  • Top rate taxpayer - If your contribution is £80, then the Government will gross this up by 50% to £160 - so effectively refunding you £80 in tax and putting it into your pension fund.

Salary Sacrifice

Not much of a sacrifice, more like a shrewd saving. You take a cut in salary equal to the amount of money you would like to have invested into your pension.

Your employer then makes the payment into your pension for you, but due to the reduce salary you take home you tax bill as well as national insurance is reduced. This benefits the employer further as their Employers national insurance contribution is also lowered. This reduction can be offered as an extra top up to your pension.

Types of Pension

  • Final Salary Pension

    You get a yearly income equivalent to a fixed percentage of the final salary you have before retirement, or when you leave that employment. The tricky part is the amount the percentage is equal to. Based normally upon length of employment, it depends on fraction the employer uses.

    For example:

    The employer expects a lifetime employment period of 40 years. Therefore for each year in employment you receive 1/40th of your final salary. Let's say you retire/leave after 15 years, with your salary at that point being £40,000. Your annual pension income would be 15/40ths of £40,000 or 37.% - equivalent to £15,000 per annum.

  • Private Pension

    A private pension is a scheme where you are responsible for making contributions into a pension of your choosing - as opposed to an employer scheme where your contributions are deducted by your employer directly.

    A standard scheme would be a simple amount contributed by you and/or your employer into a scheme of your choice until retirement, however there are two other types:

    • A stakeholder scheme which is meant to be a simple more transparent pension, with caps on charges and minimum investment amounts.
    • SIPP or Self-Invested Personal Pension - You make the contributions but you also choose where they are invested.
  • State Pension

    As long as you make national insurance payments for a minimum period of time during your working life, you will receive a small pension from the Government in retirement. This is equivalent to £107.45 per week in 2012/2013.

    Pension Calculator

    Use our pension calculator to quickly find out how much you need to contribute or how much your pension could be worth, for a comfortable retirement.

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  • Fees

    All fees charged will be paid upfront rather than added to the cost of the mortgage.

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Loan Assumptions

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Credit Card Assumptions

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  • Minimum Payments

    Payments will be assumed to be made at either 3% of the total outstanding balance or £5, whichever is the higher.

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    Balances will be paid off in the following order: 1. Purchases, 2. Balance Transfers.

  • Rate Offers

    When the offer period on a promotional/initial rate expires, interest will be charged at the normal rate.

  • Total Costs

    These take into account the amount of INTEREST charged during the comparison period.

Savings Assumptions

  • Charges

    No charges are taken into consideration when calculating costs.

  • Taxes

    For ISA's, no tax will be deducted from earned interest. For other account types, 20% tax will be deducted at the point the interest in paid.

  • Bonus Rates

    When bonus rates expire, the interest rate will revert to the normal rate advertised. In the case of fixed rate bonds, once the bond period ends, no interest will be paid.

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    Monthly interest in calculated and paid monthly. Annual interest will be calculated monthly, but paid on the anniversary of the starting date. Interest will be paid pro-rata if the comparison period ends before an anniversary.

  • Total Costs

    These take into account the total value accrued in your savings at the end of savings term. It does not take into account inflation.

Investments Assumptions

The Investments category displays Stocks and Share ISA deals only.

  • Charges

    No initial, annual or per deposit charges are taken into consideration when calculating costs.

  • Taxes

    For ISA's, no tax will be deducted from the annualised growth.

  • Rates

    Using past performance figures, we have created a compounded annual growth rate to provide a annual percentage figure to calculate growth against. This is from past performance and is NOT an indication of the future performance of the fund.

  • Interest Period

    Annual growth will be calculated monthly, but added on the anniversary of the starting date. Growth will be added pro-rata if the comparison period ends before an anniversary.

  • Total Fund Value

    This takes into account the total value of your fund at the end of invested period. It does not take into account inflation.

Pensions Assumptions

The Pensions Category displays a small selection of pensions only.

  • Charges

    No initial, annual or per deposit charges are taken into consideration when calculating costs.

  • Taxes

    No tax will be deducted from the annualised growth.

  • Rates

    Using past performance figures, we have created a compounded annual growth rate to provide a annual percentage figure to calculate growth against. This is from past performance and is NOT an indication of the future performance of the Pension.

  • Interest Period

    Annual growth will be calculated monthly, but added on the anniversary of the starting date. Growth will be added pro-rata if the comparison period ends before an anniversary.

  • Pension Value

    This takes into account the total value of your pension at the end of invested period. It does not take into account inflation.

  • Fixed Rates

    The interest rate charged is fixed for a number of years or until a certain date by the lender.

  • Base Rate Tracker

    The interest rate is set and then tracks the rises and falls of the Bank of England's base interest rate which is decided monthly.

  • Discount

    The interest rate is the lenders standard variable rate, which they decide. The discount period gives you a certain amount off that rate. The rate can be changed at anytime by the lender.

  • Variable

    The interest rate is the lenders standard variable rate, which they decide and can change anytime.

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  • Good Credit

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  • Good Credit

    If you have zero missed payments in the last 2 years, no CCJ's or defaults these deals may be available to you.

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    If you have missed a few payments as recently as the last 6 months, these deals may be available to you.

  • Bad Credit

    If you have missed payments in the past, had CCJ's or defaults, lenders in this category may have deals for you.

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Enter the minimum past annual growth percentage for funds you wish to see.

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