What is a Pension?

A pension seeks to steadily grow your investments in order to maximise the amount of money the individual has in retirement, and provide an income for the rest of their life

Emma Wall 3 April, 2017 | 9:37AM
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Speaker: A pension is a savings plan which will provide you with an income in retirement. There are three different types of pension – one which is provided by the government, one which is provided by your employer and one which you can manage yourself.

The government pension plan is funded by national contributions, or NICs. These are paid into a pot automatically from your pre-tax wages. Once you reach state retirement age these contributions are then given back to you in the form of your State Pension. You currently need to pay NICs for 30 years to qualify for the full State pension of around £150 a week.

The workplace pension plan is also funded by contributions made from your pre-tax wage. There is a legal minimum contribution made by the individual, and this is matched by the employer and topped up by the government. In the past you had to opt-in to a workplace pension scheme, but since October 2012 workers have been automatically enrolled into these savings plans. When you reach 55 you can have access to these retirement savings. The first 25% can be withdrawn tax free, but after this you are liable to pay income tax on withdrawals.

The third type of pension is called a self-invested personal pension, or SIPP. These can be managed by the individual, on online investment platforms. You make contributions from your post-tax wages but the government then tops up your contributions with the income tax you have already paid. These savings are also accessible when you reach 55.

All of these types of pension are invested in the stock market while you are making contributions, also known as the accumulation stage of retirement saving. The investments are chosen and managed either by a third party in the case of the government and workplace schemes or by the individual in a SIPP. The aim is to steadily grow the pension pot in order to maximise the amount of money the individual has in retirement, and provide an income for the rest of their life.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar

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