UK Pensions

By: EconomyWatch   Date: 21 September 2009

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A pension is a way of saving money to ensure a comfortable life post retirement. UK pensions are regarded as a highly strategic plan for a majority of the people for life after work. While there are alternative ways of saving money, there exist variable degrees of risk. So pensions in the UK are a good option, not only for monetary benefits, but also for tax relief purposes.

In the UK, people invest money for their retirement by giving it to a pension provider, who invests it. This increases the value of the investments made over a period of time. Inland Revenue further adds to the amount from money that one has already paid in taxes. Upon retirement, one uses his/her pension fund for a lifetime solution. Generally, one can take out up to 25% of the fund as a tax free lump sum.

Types of UK Pensions

The types of UK pensions can be broadly classified as:

·        Personal Pension: This is where an individual has an agreement with a pension provider to save money for his/her retirement. Personal pensions in the UK pension scheme have major tax benefits. They ensure coverage for compensation with significantly less savings. The pension fund is exempted from capital gains tax.

·        Occupational Pension: An occupational pension policy in the UK pension scheme is employer oriented. It can be contributory, where one has to contribute a part of his/her earnings in addition to his/her employer’s contribution. It can also be non-contributory, where the employer makes the entire contribution. One can also change jobs to take advantage of occupational pension. An occupational pension scheme can be of two types: Money Purchase Scheme and Final Salary Scheme.

·        Stakeholder Pension: A stakeholder pension in the UK pension scheme is a type of personal pension. Stakeholder pensions are flexible and are intended for anyone. Stakeholder pension does not have any initial fee, its annual value is set at 1% of the pension fund’s value, and it is aimed at people with moderate earnings. A user can have more then one stakeholder pension fund.

UK pensions also exist in other forms, such as annuities, SIPPs and state pensions.

In the UK pension scheme, choosing an Independent Financial Advisor (IFA) is very important, since they provide independent advice on all financial instruments, in this case, pensions. Some basic questions one might ask an IFA can be about the earnings range, how long they’ve been in the business, qualifications, regulations and specialization.


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