How do Pensions Work?
There is so much freedom and choice with regard to pension schemes for employees. There are fears such as falling for a scam, running out of money, paying more tax, buying inappropriate retirement products, or not understanding the risks and benefits.
It is important to know the different types of pension schemes and how they work to ensure you find the best fit for your future.
State pension scheme
The United Kingdom requires you to have contributed for more than 35 years to receive the newest pension benefits. Moreover, there are instances for “credited” contributions in instances where you have, for example, taken care of elderly relatives or for young children.
In case you cannot prove the 35 years payments or credits, you may not receive the full amounts but a pro-rata which is calculated as a percentage of the years done in comparison to the total. Contributions that amount to less than 10 years might not attract any state pension benefit.
Amount in figures in pension benefits
– The beneficiaries get 155.65 GBP per week, 620 GBP a month
– There is also a 2.5% increment every year
There is no need to worry in case you have gaps in your National Insurance records. You can make extra contributions to cover. You can check the gap update from the annual HM Revenue & Customs letters or personally request a State Pension forecast.
Check if you benefit from an exemption to National Insurance contributions and if you have home responsibilities protection. If you are not in these categories, you may be able to pay voluntary contributions to the missing contributions.
Company pension schemes
Many companies in the UK have occupational pension schemes which are facilitated by both employers and employees. There is an “automatic enrollment” which demands of all employers to provide employees with a workplace pension scheme.
In case you are employed, some percentage of your annual salary is put into a fund with which you can buy a pension at retirement. Currently, there is an advantage in that the occupational pension contributions are paid using the gross income.
Private pension plan
In the UK, most people get additional pension plans with insurance providers. Some individual pension schemes are linked to companies.
An example of this is where a Human Resource department collaborates with insurers to buy a group pension plan for its employees.
It is important to look at available options before settling for a pension plan. A good pension plan agency should be able to give its client a free pension health check. Professional advice and guidance can come in handy too.