Pension Basics – The UK Pension Landscape 

Auto Enrolment? State Pension? Private pension? Personal Pension? Capped Drawdown? Annuities? SIPPs? Trivial Commutation? Final Salary Pension? Money Purchase Pension?

And so on and so on.

Is it any surprise that so many of us have a hard time understanding the pensions landscape, when there is so much confusing terminology?

So, lets get some pension basics out of the way before we dive into anything more complicated,

Below we’ll take a brief look at:

  • The State Pension
  • Private Pensions
  • Workplace/Occupational Pensions
  • Public Sector Pensions
  • Personal Pensions (including SIPPS)
  • Auto-Enrolment 
  • Pension Scams

Pension Transfer Hub Pension Basics State Pensions Explained

Pension Basics – The State Pension

To get full entitilement to the state pension you will need to have made 35 years of National Insurance (NI) contributions.

Any less than this and you will not receive the full state pension.

To get any state pension at all you need to have made at least 10 years of contributions.

In recent years, the government have made it easier for you to check your state pension entitlement.

Simply google ‘my state pension’ and you will find the government’s portal with information on when you will receive your pension and also details of any gaps in your NI record.

Remember: it’s possible to make NI payments to cover any gaps – but only if these gaps are within the last 6 years.

Check Your State Pension

Pension Transfer Hub Pension Basics Workplace Occupational pensions

Pension Basics – Private Pensions

Private pensions are commonly referred to as workplace or occupational pensions and are either:

Defined Benefit  (also known as ‘gold-plated’, ‘final salary’, or ‘career average’)

or;

Defined Contribution (also known as money purchase).

With a Defined Benefit pension….the benefits are defined.

And this is a very important thing to note.

Because with a Defined Contribution (money purchase) pension only contributions are defined!

Defined benefit pensions pay a regular pension income based on 3 things:

  • The number of years you were a member of your employer’s scheme;
  • Your pensionable salary (which could be final or average of);
  • An accrual rate (the proportion of your salary that will be paid as a pension).

Unlike most public sector schemes which are unfunded, private sector pensions are funded. 

Most private sector Defined Benefit pension schemes are in deficit, however.

And this mean they may have difficulty in meeting their pension liabilities in the future.

But don’t worry!

In a worst case scenario (if an employer or ex-employer becomes insolvent) then any related pension scheme should get cover from the Pension Protection Fund (PPF).

As a result of these valuable protections defined benefit pensions are the most preferable type of pension to have.

Most pensions available in the private sector these days are Defined Contribution (or money purchase) pensions.

More on Defined Benefit pensions 

Defined Contribution (Money Purchase) Pensions

If you’re currently a member of an employer workplace/occupational scheme it’s probably a Defined Contribution (DC) money purchase scheme.

This means:

  • All investment/return risks are with you.
  • If you don’t make the right. investment decisions you may not get the returns you need.
  • Your projected retirement pension pot may be lower than anticipated.
  • You may have to work longer.
  • Financial freedom ‘dreams’ may evaporate.

BUT, you may achieve outstanding returns and have surplus funds at retirement.

This means everything MAY work out alright.

Pension Transfer Hub Pension Basics Public Sector

Pensions Basics – Public Sector Pensions

Public sector pensions include those for Teachers, Armed Services, Police, Judiciary, Civil Service, Health (NHS) and Local Government.

With the exception of Local Government pensions, all other public sector pensions are unfunded.

This means that tax collected today pays the current public sector pensions in payment.

As you can imagine, this poses significant challenges to the government, especially with current liabilities of nearly £2 Trillion

That’s £2,000,000,000,000.

At some point in the future either the payments will no longer be made or there will have to be sharp tax increases to maintain payments.

Public sector pensions became synonymous with the term ‘gold plated’ due to the very generous benefits attached. 

The Government has taken some action to reducing the public sector pension deficit, however. All public sector now use a valuation method based on ‘career average’ rather than ‘final salary’basis. 

Pension Transfer Hub Pension Basics Personal Pensions

Pension Basics – Personal Pensions

Personal pensions are set up between a member and a pension provider (usually an  insurance company). If you’re one of the many self-employed this is probably the type of pension you have.

Confusingly, employers also provide personal pensions known as ‘group personal pensions’. Effectively, these are individual pension contracts with your employer making contributions as well as you.

When personal pensions were first introduced in 1988 they replaced Retirement Annuity Contracts (also known as Section 222 or 226 contracts).

Large numbers of people took the decision to tranfsfer away from their existing defined benefit pensions and this resulted in a miss selling scandal, and large compensation claims.

Unfortunately, this is a trend throughout the history of pensions and continues to the present day with various types of pension scams.

More on Mis sold pensions and Pension Scams

Pension Transfer Hub Pension Basics SIPPS

Pension Basics – Self Invested Personal Pensions (SIPPS)

SIPPs are another type of personal pension and have become increasingly popular due to the wide range of  investment opportunities available. 

SIPPS were originally for those with a good grasp of ‘self investment’ but have increasingly been used by many non-experienced investors. Whilst increased investment opportunities are the main attraction, SIPPs have faced criticism for high fees and unclear adviser charging.

Pension Transfer Hub Pension Basics Auto Enrolment

Pensions Basics – Auto Enrolment

As a mechanism to get more people into the pension savings habit ‘Auto-Enrolment’ has been a success with almost 10 million individuals making savings towards pensions.

For many individuals in their 20s and 30s this may translate into substantial pension savings accumulation, if substantial contributions are made.

As with all pensions’ savings it’s the level of contributions that are crucial to how much your eventual retirement fund will be.

Pension Transfer Hub Pension Basics Pension Transfers

Pension Basics – Pension Transfers

Pension transfers have been a hot topic for many years. This is because of the generally accepted ‘ideal’ that any type of pension offering guaranteed benefits (also known as safeguarded benefits) are extremely valuable.

And they are.

But it’s also true that the increased options for taking pension income are attractive and allow a level of flexibility and control that’s just not possible with taking income from a DB pension.

There are many considerations to tack into account and it’s a regulatory requirment that a qualified and authorised advisor is used for pots worth more than £30,000.


Why Transfer? 

Pension Basics – What Next?

This introduction to pensions has breifly covered the main types of pensions that are in the UK market.

Whether you’re new to pensions, thinking of auto-enrolment, thinking of transferring, looking at investment options for pensions or wondering whether the next ‘big thing’ promising ‘great returns’ is a pension scam.

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