There are two main pension types in the UK namely Defined contribution (otherwise known as a money purchase pension scheme) and Benefit pension. A benefit pension is where the pension provider promises to give you a certain amount each year when you retire. However, a defined pension is a type of pension scheme where the pension pot is based on how much money is paid into the scheme.
Benefits of a Defined Pension Scheme:
- Can be a company pension or private pension
- Pension pot is based on the contribution from you and/or your employer.
- The money added to the pension by yourself and/or your employer is invested by the pension scheme
Disadvantage of Defined Pension Scheme
- The final return with these pensions is not guaranteed and the value of the pension pot can go up or down depending on how investments perform.
There are three main options available once you retire namely lifetime annuity, flexi-access drawdown and a lump sum payment.
It guarantees you with a regular retirement income for life. Lifetime annuity options and features vary and your choice will depend on your personal circumstances and your life expectancy.
Flexi-access is also referred to as a pension drawdown. It can give you more flexibility over how and when you receive your pension. You can take up to 25% of the pot as a tax-free lump sum.
Lump Sum Payment
A lump-sum distribution is a one-time payment from your pension administrator. By taking a lump sum payment, you gain access to a large sum of money, which you can spend or invest as you see fit.
These options can be used on their own or in combination. The first 25% drawdown is tax-free and the remainder is taxed at the individual’s marginal rate.
There are no overall limits to employer or employee contributions and no upper limit to the total amount of pension saving that can be built up. However, there are limits that affect tax relief on pension contributions including an annual and lifetime allowance.