Three essential things you should know about pensions

Three essential things you should know about pensions

Pensions are quite complex and often a source of confusion for many people. Instead of getting bogged down with the details, understanding the basics is vital.

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What exactly is a pension? Essentially, a pension is a type of investment fund that provides financial protection during retirement. When you earn income from your job, some of this may go into a pension pot. You can pay into a pension fund yourself, or your employer or even the government may contribute to your pension fund.

Here are three vital aspects you should be aware of when it comes to pensions.

1. Pension types

There are two main types of pension funds: state and private.

According to Citizens Advice, the State Pension is a regular payment from the government that most people can claim once they reach State Pension age. How much State Pension you will receive depends on how many years of National Insurance contributions you have made.

If you or your employer invests in a personal pension pot, this is known as a private pension. Private pensions can be further split into two types, namely a Defined Contribution Scheme and a Defined Benefit Scheme. You or your employer controls a Defined Contribution Scheme, while a Defined Benefit Scheme is regarded as a Workplace Pension and is normally organised by an employer. With the latter, how much pension you get will be determined by your income and length of employment.


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Deciding which type of private pension scheme to invest in can require a lot of insight and research to ensure you are getting the best deal for your money. It might be wise to seek expertise from an independent financial advisor Wroughton business, such as

2. Self-employment

If you are self-employed, the rules regarding State Pension still apply, as it is based on a person’s National Insurance contributions. However, you may be able to get tax relief if you work for yourself.

3. Benefits

One of the best reasons for investing in a pension is that you may be eligible for tax relief. You will stay gain tax relief on your pension, even if you do not earn enough to pay tax. Additionally, it is a legal requirement for employers to enter staff into a pension scheme through Automatic Enrolment.



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