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What is a Pension?

To many people pensions seem like a particularly complicated financial product. In reality though, pensions are far from complicated, and everyone should understand their pension and the type of scheme they are paying into.

The sole aim of a pension is to provide you with a regular income when you retire. People who have worked in the UK and have paid 30 years or more National Insurance will qualify for the full State Pension, which currently stands at £110.15 per week.

However if you are looking to ‘earn’ more per week in your retirement, then it is worth looking at taking out one or more other types of pension to run alongside your State Pension. There are a variety of options including, Occupational Pension schemes, Stakeholder Pensions and Self-Invested Pension Plans.

The amount you will be paid in your retirement will directly reflect the amount you have paid into your pension plan throughout your working life. This means that the earlier you start paying into your pension, the more you are likely to get per week when you retire. As well as this, the effects of compound interest could further boost the fund.

Here are some key terms that relate to pensions:

1. Tax-Exempt

A pension puts a tax ‘umbrella’ over your savings. This means that your money is free from tax and as such has a greater ability to provide you with a higher payout. All investments in a pension scheme will grow free from income tax and capital gains tax.

2. Tax Relief

Every time you pay money into a pension scheme, tax relief ensures that this money is not touched by HMRC. This means that if your employer, for example, is paying £100 per month into your pension scheme, then you will actually receive 20% tax relief and your pension plan will obtain a total of £120. Basic rate tax payers will get 20% tax relief, higher rate tax payers get an additional 20% and top rate tax payers an additional 30%.

3. Inheritance Tax

In the unfortunate event that you die during the term of your plan, you can usually pass the fund on to your beneficiaries free from inheritance tax.

4. Annuities

An annuity is the money you are paid as a regular income once you start to receive benefits from your pension

5. Taking a lump sum

You can take up to 25% of your total pension pot as a lump sum when you retire.

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