Types of Pensions & Investment Schemes

Aside from the State Pension which the government offers you when you reach a stipulated age, there are other types of pensions which you can also benefit from as a UK citizen. These pensions mainly fall under two groups, personal pensions and workplace pensions.

Below is a detailed look on personal and workplace pensions. Find out what they are, how they work, and how they can benefit you in the long run.


Personal Pensions

A personal pension is a scheme that you initiate as individual. In this case, you choose the pension provider and then enter a defined contract with them. You will then start making regular payments to the pension fund and get to accrue some solid income to help you upon your retirement. Personal pensions are in most cases provided by insurance firms.

A personal pension is ideal for self-employed as well as employed persons. It can in particular benefit you if you are employed but aren’t eligible for automatic enrolment into your employer’s pension scheme. People who aren’t working at all can also enroll in a personal pension scheme, all that matters is that you be in a position make the required monetary contributions. A person can make individual contributions to the pension scheme or they can alternatively arrange with their employer to make payments on their behalf.

The contributions made to a personal pension fund are usually invested so as to accrue additional earnings over time. money is invested in various ventures including shares and stocks. The money can be invested in a number of ways including shares and stocks. An account holder is then paid the sum total upon his or her retirement.

It’s never possible to determine in advance the amount you’ll get from a personal pension fund. Your ultimate earnings depend on the amount of contributions you make and the type of investment channel you choose. All in all, you are assured of some earning from the fund upon retirement.

In regards to advantages, personal pension schemes often have the advantage of flexibility and tax relief.


Tax relief on a personal pension

As a UK taxpayer below the age of 75, the government allows you to make a tax free contribution of up to £40,000 of your yearly earnings into a pension fund. Contributions beyond this amount are still permissible but are however liable to taxation. You may be taxed up to 40% and beyond on such amounts.

If you’re not earning any income, you’re eligible for tax relief on contributions of up to £3600 in a year.

Higher rate taxpayers are eligible to claim tax relief on up to 40% of their pension contributions while additional rate taxpayers can claim up to 45% tax relief.

There is also the issue of lifetime allowance. A lifetime allowance refers to the maximum pension pot size. In a case where your pension pot exceeds the lifetime allowance, the extra amount can be taxed. You may apply for tax protection from the government so that your extra contributions become exempt from taxes.

Because clients usually make pension contributions after paying taxes, pension providers usually have the duty of claiming the tax relief a client is owed from the government. They then pay that amount to your pension fund. Your pension provider can however only claim a 20% tax relief, you will have to claim the rest on your own if you are a higher rate or an additional rate taxpayer.


Investing your personal pension fund

The choice of investment is usually left to you as an account holder. Your pension provider will provide you with a set of investment options and then leave you to make a choice from among them. The choice of an investment channel is often guided by three factors. These include:

  • The amount of money you have for investment.
  • The length of time you have left before your retirement.
  • The level of risk you are prepared to take.

It is advisable to seek guidance from an independent financial adviser before settling on a particular investment channel.

In regards to investment options, most pension providers usually offer their clients these four broad categories of investment:

  • Cash: In this kind of investment, you buy cash deposits or other investments which offer a deposit-style return. Holders of a self-invested personal pension (SIPP) account are allowed to buy actual bank accounts.

  • Bonds: These are loans to the government or private companies. They gather a given amount of interest until the loan is paid off.

  • Property: Under this investment plan, you can use your pension fund to buy shares in a company that deals in property and land. A holder of a SIPP can purchase physical buildings or land.

  • Equities: Equities refer to shares in private companies.


Risks related to the investment choices

Each investment choice carries its own unique kind of risks. A choice such as shares carries more risks because the value of shares can plummet at one point or another. Choices like cash and bonds are however viewed as more stable since you are assured of a return.

It’s important to take time and understand the risks involved with a given investment plan before settling on it. This is because a wrong choice of investment often leads to you less pension than you could have had.

You shouldn’t however be afraid to launch into deeper waters, this is because the more risky an investment is, the more the earnings it generates in the end. Some pension investments may be safe but in the end they yield very little in return.

If you start your pension pot earlier on in life, you can be able to delve into more risky investment plans as you will have more time to recover from any loss which you may incur. It is however advisable to stick to less risky investment plans if you begin saving for retirement at a later age. This will ensure that the final pension you receive isn’t reduced because of reasons such as short-term changes in stocks value and so on.

Pension providers often refer to the concept of sticking to safer investment options as ‘lifestyling’. You can resort to the option of ‘lifestyling’ if you so wish. It is in particular advisable if you are nearing retirement.

Financial advisers usually understand the specific risks involved with a given kind of pension fund investment. For this reason, you should ideally seek their help before deciding on an option.


Pension funds related to personal pensions

Aside from standard personal pension accounts, there are other two pension fund accounts which are classified under or alongside personal pensions. These include stakeholder pensions and self-invested personal pensions (SIPPs).


Stakeholder pensions

Stakeholder pensions are more of personal pensions. They have the following distinct features:

  • A stipulated minimum monthly contribution of £20. You can however contribute a higher amount than this if you wish to do so.

  • No requirement of regular contributions. It’s entirely up to the account holder to decide when and how to make contributions to the pension pot.

  • The pension provider cannot charge beyond 1.5% of the fund’s value as administration fee for the first 10 years. They also cannot charge more than 1% thereafter.

  • There aren’t any penalties if you miss or stop making payments.

  • You can change payment schemes at any given time without incurring a penalty.

A stakeholder pension account is especially suitable if you want a pension scheme which offers you high flexibility in terms of amount and interval of payment.


Self-invested personal pensions (SIPPs)

These pension schemes differ from stakeholder and standard personal pensions in that they give you the freedom not only to choose but to also manage your investment. In the case of stakeholder and standard personal pensions, your investments are usually managed for you within the fund.

Providers of SIPPs include insurance firms, pension consultants, and fund managers. You can choose a suitable pension provider from any of these.

Apart from managing your investment on your own, you can also choose a qualified and approved manager to make decisions on your behalf. You can check with the Association of Member-directed Pension Schemes (AMPS) to find an approved pension fund manager. Their website is www.ampsonline.co.uk.

It’s better to only consider a SIPP if you’re an experienced investor or if you have a large amount of funds to manage. This is because SIPPs tend to be more expensive given the risks involved in managing the fund on your own.


Benefits of a personal pension fund

A personal pension fund offers the following benefits:

  • It offers you an income upon retirement. This can be offered from the age of 55 onwards. You can choose to take out the pension in a number of ways.

  • A pension amount that is payable to your widow, widower, civil partner, or any other listed dependant.

  • A lump sum that is payable to your widow, widower, civil partner, or a dependant if you die before retirement. This amount is tax free.


Pension scams

You should be careful about pension scams because they are lately on the rise. Ever since new rules permitted people to take lump sums from their pension pot, pension scam cases have been on the increase.

Be on your guard against pension providers who are only out to con you of your cash. Before signing a contract with any pension provider, ensure they are registered and approved to offer the kind of services they claim to offer. You should try and choose a well known service provider to ensure the safety of your money.


Workplace pensions

A workplace pension scheme is a retirement saving scheme whereby contributions are directly deducted from your salary. Your employer can also make contributions towards the scheme. In a case where you’re eligible for automatic enrollment into a pension scheme, your employer has to make payments to your pension pot.

There are two main kinds of workplace pensions. These include:

  • Occupational pension schemes
  • Group personal pensions or stakeholder pensions


Occupational pension schemes

Occupational pension schemes are schemes which are arranged by an employer to provide an employee with a retirement pension. They are further divided into two categories namely final salary schemes and money purchase schemes.


Final salary schemes

These pension schemes are also referred to as defined benefit schemes. In the case of a final salary scheme, your pension is directly linked to your salary. This means that your pension increases with the increase of your salary as you go on working for your employer.

The amount you get in this scheme in the end depends on two factors. These are, your salary at retirement and the number of years you have spent in your job. Your pension is not in any way dependent on the stock market’s performance or other investments.

In most cases of final salary schemes, an employee pays a given percentage of their wages towards the fund while their employer pays the remaining amount.


Money purchase schemes

A money purchase scheme is also a type of defined contribution scheme. It is also aimed at giving you a package upon retirement.

In a money purchase scheme, you make contributions which are then investment earn you additional amounts over time. The pension you are offered in the end depends on the amount you contributed and how well the fund’s investments performed.

You’ll be required to pay a given percentage of your wages into the fund. Your employer may also contribute regular amounts towards the fund but it isn’t always so. Your employer is however obliged to make regular payments towards your fund if you’ve been automatically enrolled in a workplace pension.

You should seize the opportunity and join a workplace pension scheme in a case where your employer also makes payments to the scheme. In a case where your employer doesn’t contribute to the scheme, you might want to compare different schemes in order to find one which is both affordable and suitable.


More benefits of occupational payments schemes

Aside from a retirement package, occupational payment schemes offer the following benefits:

  • A life insurance cover which gives your dependants a lump sum or pension when you die while still under employment.

  • A pension in case you’re forced to retire early because of issues of ill-health and so on.

  • Pensions to your spouse, civil partner, or dependants when you die.


Group personal pensions or stakeholder pensions

These pensions work in a similar way to personal pensions. In these case, your employer chooses a pension scheme and then you enter into an individual contract with the pension providers. You will then make contributions to the funds from your wages. These funds are further invested to grow your fund.

In this particular kind of scheme, your employer gets to choose the investment channel for your funds. Your employer may also contribute towards the fund but they aren’t obliged to do so unless otherwise.


Automatic enrollment into a workplace pension scheme

UK employers have been instructed to enroll eligible employees in a workplace pension scheme. They were required to do so between the period of October 2012 and April 2017.

You are eligible for automatic enrollment into a workplace pension scheme if you meet this conditions:

  • You work in the UK
  • You are aged 22 and below
  • You are under the stipulated State Pension age
  • You earn more than £10,000 in a year
  • You aren’t already enrolled in any workplace pension scheme

If you don’t wish to be under an automatic workplace pension scheme enrolment, you can always opt out.


Finding out about your workplace pension scheme

When you join a new workplace, it’s important to find out about the pension schemes which are available at your workplace. These are some of the things to look for:

  • Your eligibility for automatic enrolment into a workplace pension scheme
  • The type of pension scheme, is it an occupational or a workplace scheme?
  • The percentage of your wage that you’ll have to contribute towards a given scheme
  • If your employer contributes to a workplace scheme or not. Also how much they pay in case they’re contributing to the fund.
  • The channel of investment for your fund
  • How you will know about the amount that is available in your fund
  • Whether you’ll be able to join the scheme at a later date if you don’t do so immediately.


Tracking your pension scheme

You should take care to ensure that all is well in regards to your pension scheme. The amount you contribute towards the fund should be indicated on your pay slip. It should also additionally appear on your yearly P60 tax information.

In case you suspect anything out of the way with your pension fund contributions, you should inform your employer and have it sorted out as soon as possible.


Other pensions

Aside from the aforementioned pensions, there are also other types of pensions available to UK citizens. These include pensions which are given to servicemen and their families among other kinds of pension schemes.