It has just been Pension Awareness Week. Pensions may not be the most glamourous topic, but they are really important to think about, ideally from a young age. We know that there is still a gender gap when it comes to pensions, with a contribution gap of 17% for women. At FSCS, we carried out research where only 27% of adults under 65 who are not yet retired told us that they are actively saving for their retirement.
Pensions are often something we push to the back of our minds; retirement may feel like a long way off, or they are something we don’t fully understand. Pension products are becoming more complex, and there’s a greater choice of options available than ever before. At FSCS, we want to make sure people are making informed choices with their money. We were set up by parliament over 20 years ago to protect you if a financial firm goes bust and can’t repay you money they owe. As well as pensions advice, FSCS protection covers a range of financial products, including deposits, debt management plans, insurance, investments, and mortgage advice. If you do need to make a claim, you can do so directly, and for free. You need to make sure that the product or service you’re claiming for is authorised by the FCA or PRA and carrying out regulated activity. You can take a look at the full details on FSCS protection, compensation limits, and more on the FSCS website.
In light of Pension Awareness Week, we thought it might be useful to explain some of the terms used when talking about pensions.
There are three main types of pension in the UK:
State Pension
A pension that you claim from the government when you reach the state pension age. The maximum you will get will depend on your working history and how much in national insurance contributions you have made during your working years.
Defined contribution pension schemes (also known as a money purchase pension)
The most common type of pension. It can be a workplace pension, arranged by your employer, or a personal pension which you would arrange directly with a pension provider. If it is arranged through your employer, they will normally deduct money from your salary before it is taxed and will also add contributions on your behalf; this will be a minimum of 3% of your salary but could be more. The money in your pension is invested by the pension provider. The value of your pension may go up or down depending on how well the investments do. The closer you get to retirement age, some pensions may move your money into lower-risk investments.
Defined benefits pension schemes (also known as a final salary pension scheme)
This is a workplace pension scheme; rather than building a pension pot, it gives you an annual income after you retire. The amount you’re paid is based on how many years you’ve been a member of the employer’s scheme and the salary you have earned during your time with an organisation. These types of pensions are normally found in public sector or government jobs.
Mini pension jargon buster
SIPP (Self-Invested Personal Pension) - is a type of pension that lets you choose your own investments and from a wide range of products.
Salary Sacrifice – This is when you give up part of your salary in return for a tax or National Insurance benefit. Money will be taken directly out of your salary before you receive it to be contributed to your pension.
Annuity - An annuity converts your savings into an annual pension, which will give you a guaranteed income for life, or for a specified period of time.
Annual allowance – The amount of money you can build up in your pension pot and receive tax relief.
Useful links
https://www.fscs.org.uk/check/pension-protection-checker/
https://www.financial-ombudsman.org.uk/
https://maps.org.uk/en#
https://www.moneyhelper.org.uk/en