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Whether you’re a few years out or looking decades ahead, self-employed or on a regular salary, putting money aside for retirement is a smart move to make. And, if you’re an employer, it’s important to understand what your obligations are when it comes to setting up pensions for your employees.
But if you find pensions perplexing, rest assured you’re not alone. To help get your ducks in a row, let’s look at the different types of pensions, who they’re suitable for and what you need to do to access them or set them up.
What are the main types of pension?
There are three main types of pension:
- The State Pension, which is based on your National Insurance record and will give you a basic income once you reach the eligible age.
- Workplace pensions, which both the employee and employer contribute to.
- Personal pensions, which can be set up and paid into independently – ideal if you’re self-employed.
Let’s go through each of these in more detail, answering any questions you may have.
The State Pension
What is the State Pension?
Put simply, the State Pension is a retirement pot from the government. Once you’re of age, it’s paid out weekly. Exactly how much you’ll receive is dependent on your overall National Insurance record.
What is the State Pension age?
This is the earliest age you’ll be able to claim your State Pension. The current UK State Pension age is 66, but this is subject to change and expected to increase over time. You can use this calculator to find out when you’ll be able to claim yours. Or, read our full retirement age guide.
How much is the full State Pension?
In the current tax year (2021/22) the full State Pension sits at £179.60 a week. Again, this is likely to change over time.
It’s also worth noting that you’ll need 35 qualifying years of National Insurance contributions in order to claim the full amount.
If you don’t have 35 years under your belt (but you have more than 10) you’ll still be entitled to the State Pension, your weekly amount will just be less.
Do you get a State Pension if you are self-employed?
Great news. Even if you’re self-employed, you’re entitled to the State Pension in the same way as everyone else. That’s because you’ll have made National Insurance contributions during your self-employment.
So, whether you’re registered as a sole trader or a limited company, there’s a pension with your name on it.
What is a workplace pension?
Also known as an employer pension scheme, a workplace pension is a pension that’s set up by an employer. Contributions are taken directly from the employee’s wages and employers are also required to contribute at least 3% of each employees’ qualifying earnings.
The qualifying earnings differ between pension schemes, so it’s worth checking with the one you’re using, but most qualifying earnings will be the employee’s total earnings between £6,240 and £50,270 a year before tax.
An employee’s total earnings includes salary, any bonuses or commission, overtime, statutory sick pay and statutory maternity, paternity or adoption pay.
How does a workplace pension work?
By law, employers are required to offer a workplace pension scheme and contribute to it. A percentage of the employee’s salary goes into the pension each payday and an additional percentage will be paid in by the employer.
If you’re an employee, workplace pensions are a great way to save because payments are usually taken off before tax. And if not, you can claim tax relief at the end of the tax year.
How to set up a workplace pension
If you’re an employer, you must set up a workplace pension scheme and make a contributions to all eligible employees.
There are three conditions for what qualifies an eligible employee. They must:
- Be aged between 22 and the current State Pension age
- Earn at least £10,000 per year
- Work in the UK
If an employee enters the correct age bracket or begins earning enough to qualify, it’s up to you to enrol them onto your workplace pension scheme and notify them within 6 weeks of the day they become eligible.
Can you get a state pension and a workplace pension?
Whether or not you pay into a workplace pension will make no difference to your State Pension entitlement. The more the merrier.
What is a personal pension?
As the name suggests, a personal pension – also known as a personal pension scheme – is a private pension plan you set-up and pay into yourself.
Who can start a personal pension?
Anyone can start a personal pension. Even if you have a workplace pension, you can start a personal pension scheme independently. Personal pensions are particularly suitable to those who are self-employed, so if you’re your own boss, this one’s for you.
Are there different types of private pension?
There are a few different options when it comes to personal pensions:
- Standard person pension – these are provided by most banks and building societies, who will invest funds on your behalf.
- Stakeholder pensions – these provide the flexibility of low minimums, the ability to start and stop payments as you wish, as well as default investment options (if you don’t want to choose your own).
- Self-invested pension plan (SIPP) – these give you wider choice and control over how your money is invested – usually with the help of a financial adviser.
What is the best personal pension?
It’s ultimately down to your individual needs. Whether that’s flexibility, level of investment risk, the affordability of minimum payments or annual charges – these are all things to consider when choosing your pension plan.
Can employers pay into a personal pension?
Yes, they can. However, contributions to a personal pension are normally made after tax, so you’d be better off making the most of your workplace pension’s automatic tax relief, as well as the minimum 3% of your salary your employer is required to pay in.
Are personal pension contributions tax-deductible?
If you’re self-employed and you fill out a Self Assessment tax return, you’ll be able to claim tax relief on personal pension contributions. For basic rate taxpayers, this effectively means the government will top-up your savings by 25%.
To learn more about this, read the government’s guide to pension tax relief.
A safety net for everyone
Pensions are a great way to save for retirement and can act as protection for you and your family. This is much the same for business insurance. If you own a small business or you’re a self-employed prorfessional, having the correct cover in place can protect you from risks that could affect your business.
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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
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