Are you planning for your retirement? Pensions have always played a crucial role in retirement planning. They are the best way to build wealth for your future when you may stop working by choice or for some reason. In the United Kingdom, various pension planning opportunities help you to do so.
Pensions are available only to those who are residing as well as working in the UK. They must also have a UK National Insurance Number. In 2023, the state pension age is 66 and is supposed to increase in 2028. So, with no more delay, let’s know the pension planning opportunities in detail.
This is the easiest pension scheme you can opt for at your workplace. In workplace pension, the employer also makes a fixed regular contribution. However, this type of pension can be further classified into three types.
Defined Benefit (DB) Pension Scheme- Set up by the employer, this pension scheme is also called the final salary pension scheme. One of the best things about this scheme is that you get a pre-defined income for life from the pension provider as you will receive a fixed amount each year after retirement. This will mostly depend on your salary and the number of years for which you have worked for your employer. However, this pension scheme is gradually declining in the private sector.
Defined Contribution Pension Scheme- In this scheme, a small percentage of your monthly salary will be put aside by your employer. This happens on every payday automatically. This process is called automatic enrolment.
Introduced in 2012, employees earning at least £10,000 per year are automatically enrolled into this scheme. Unless they choose to opt-out, a well-defined amount of their wage will be put aside, which will entirely depend on their age and earnings.
Easy to set up, this is usually considered a thoughtful scheme for saving money to enjoy a stress-free retirement. However, one of the major disadvantages of this pension scheme is that the amount of money received when you choose to take out your pension is not defined like the defined benefit pension scheme. It will depend on the performance of lower-risk investments as the pension provider puts your and your employer’s contributions into the same.
Collective Defined Contribution (CDC) Pension scheme- Introduced by the Pension Schemes Act 2021, this new type of pension scheme is quite innovative and acts as a middle ground between Defined Benefit and Defined Contribution Pension Schemes.
While the Defined Benefit scheme is no longer appealing to employers, the Defined Contribution scheme does not guarantee a steady income after retirement. So, this CDC scheme is introduced, but there are speculations that this may not be suitable for all employees as it lacks the certainty of a steady income offered by the DB pension scheme.
However, large employers employing thousands of employees may find this scheme attractive as it comes with no risks of DB funding.
These types of pension schemes are set up by people not eager to enrol in the workplace pension scheme or want to have some extra amount after retirement to beat the rising inflation.
You can also open a defined contribution pension scheme as a personal pension from any pension provider offering the best investment options and customer service. Moreover, Self-Invested Personal Pensions (SIPPs) are also quite popular in the UK as they provide much-needed flexibility in terms of having investment choices and promise higher returns.
The pension amount in this scheme is dependent on the National Insurance record. At present, the New State Pension is £203.85 per week, and to receive the same, you must fulfil some eligibility criteria, like delaying the process of taking out your state pension. The best part is that you can have this state pension even if you already have a personal or workplace pension. However, the per-week pension amount is not the same for those who have attained the State Pension age before 6 April 2016. In such a case, it is less than £93.60 per week according to the basic State Pension.
Remember, there is also a Pension Credit in the United Kingdom that offers some extra money to people who have crossed the State Pension age and are struggling with low income. Moreover, pensions are also taxed, and it is best to consult an experienced accountant before making any move to have the best pension scheme for your retirement. With their expertise and after developing a thorough understanding of your retirement goals, they can guide you to take the best course of action.