The Power of Pensions

Pensions provide a tax efficient way of saving and are key to securing your lifestyle during retirement. 

There are different types of pensions available, so you can choose what suits your circumstances. The most talked about pensions are usually the State Pension and the Workplace Pension. Other pension types are available – read on to learn more about how they could benefit you. 

Pension types

Defined Contribution (DC) schemes: also known as a ‘money purchase scheme’, the benefit (or ‘pension’) is based upon the value of the plan at retirement.  

These pensions are often ‘personal pensions’ or ‘Self Invested Personal Pension Plans’ (‘SIPPs’). The future value is determined by the amount paid over the lifetime of the plan and the performance of the chosen investment funds.  

Defined Benefit (DB) schemes: commonly referred to as ‘final salary’ pensions, build a guaranteed income at the scheme retirement age, based upon years of service and salary, though new schemes in the private sector are rare.

Workplace pensions: All employers must offer a workplace pension by law and automatically enroll employees to enable pension contributions to be paid by the employee, the employer and the government.  These are commonly set up as a ‘DC’ scheme.

Charlotte Elgar, independent financial advisor from MHA, said: "Contributions to pension schemes, where meeting certain criteria, can reduce your taxable earnings and therefore your marginal rate of tax, with basic rate tax relief applied within the pension, and tax relief at higher or additional rates being reclaimed via your tax return (unless paying via your workplace pension with a ‘net pay arrangement’ or ‘salary exchange’, in which case no tax return is required).”

"Growth within a pension is free from both capital gains tax and income tax."

Growing your defined contribution pension fund 

Various investments can be held within a pension. For typical pensions set up by workplaces, or group personal pensions, a range of funds are available to choose from – though often limited. Some will be sector or asset class specific, and some will be risk-rated funds. 

Some pension contracts are structured as Self-Invested Personal Pensions (SIPPs), whereby a greater range of underlying investments can be held, including direct shares, and potentially commercial property. 

You can find out more by clicking here.