What follows is a full explanation of pensions including;

A means for a government to encourage people to provide, via savings, for their own retirement by offering incentives through tax breaks (a reduction in tax otherwise due). This is beneficial to both parties as it allows you to reduce the level of tax you would pay whilst it can also reduce the level of retirement subsidies a government may be liable for.

Technical explanation of a pension

A legal structure (known as a wrapper) which allows any investments held within it to benefit from an advantageous tax treatment.

Pension definition - what is a pension in graphical format. Pensions and investments

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There are two general forms: defined benefit (final salary) & defined contribution (money purchase) schemes.
Defined benefit plans are employer funded schemes. The most popular variant are final salary schemes though other variations including career average earnings exist.
Defined contribution plans can be either private or occupational offerings. Many variations exist including Stakeholder Pension (SHP), Self Invested Personal Pension (SIPP), and Additional Voluntary Contributions (AVC).
A stakeholder pension has to follow stricter Government rules than other forms of Personal Pension Plans (PPP). These include limits to charges that can be applied, the ability to alter your contributions without penalties and the option to move provider without any exit fees.
A Self Invested Personal Pension offers a wide range of investments to give you more control over how you invest.
AVCs are offered by employers of both final salary and money purchase schemes. In the former they can be used to purchase added years. Both may allow an employee to bolster their pension pot in a cost effective convenient manner.
For anyone who holds a UK pension but is classed as residing overseas for tax purposes they have the ability to transfer their pension into recognised international schemes including QROPS and International SIPPS.
There are legitimate reasons for certain people moving their pensions. Expatriates may benefit from QROPS’ ability to offer higher tax free lump sums whilst UK residents may take advantage of improved investment options. It is important to be fully informed of the pros and cons of any pension transfer to ensure that you are not misinformed.
  • Pensions provide a tax efficient way of saving for retirement
  • Ability to defer income tax and reduce or avoid other taxes due on your salary

UK pensions are entitled to tax relief. This can either be done from your pre-tax earnings or indirectly via salary sacrifice. The latter is an agreement between an employee & employer where the former accepts a lower salary for a confirmed pension contribution rate. The advantage to both parties is that they can pay less in National Insurance Contributions (NICs are another form of tax).

  • If salary sacrifice is used a reduction in NICs paid may be detrimental to your entitlement to certain State benefits. You should consult with your employer or financial adviser regarding whether this option is beneficial or detrimental to you.
  • Unable to access prior to the minimum retirement age set out by law (currently the State Retirement Age of 65 less 10 years i.e. 55) except in limited circumstances
  • Potentially high penalties for not following the rules and regulations
  • Responsibility of pension decisions rests with you

For example, if you engage in pension liberation you may receive a hefty tax charge & further penalties irrespective of whether you are aware of the mistake or not.

  • Subject to future rule changes which may have negative impacts. One possibility comes from the change of wording in HMRC literature of the tax free lump sum to pension commencement lump sum (PCLS) which is currently zero tax rated

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Pensions in the UK are governed by HMRC (Her Majesty’s Revenue and Customs) who are the state’s tax authority. They are responsible for the collection of the appropriate rate of taxes thus they ensure that rules & regulations concerning tax affairs are followed accordingly.
The Pensions Regulator regulates UK work based pensions. It’s aim is to maximise compliance of occupational pension schemes through giving appropriate guidance where required.
Private pensions must be registered with the Financial Conduct Authority (FCA) who perform the necessary UK regulatory duties.
Following the latest pension amendment announced in the UK budget 2014 rules governing pensions are as follows;

The value is measured when a benefit crystallisation event occurs: either you reach 75, decide to access your pension or move your pension overseas. Exceeding the limit will leave you liable for a Lifetime Allowance (LTA) charge

Pensions are based on existing laws though rules can be altered by amendments to legislation. In the UK the first major pension change occurred on the 6th of April 2006, known as A-day. The key aim of which was to simplify the system and greatly increase the flexibility offered though it still constrained how much income could be withdrawn annually.
Following the UK budget 2014 flexibility has increased further and pensions are set to be fully flexible from 6th April 2015 when the implementation of the latest pension changes will be enacted.
From the 6th of April 2015 pensions are set to undergo a transformation. They will give pensioners complete freedom to access their pensions as and when they like so long as they pay their marginal tax rate. As such, any pension withdrawal is added to your income for the year and you will pay tax at the relevant rate.
To confirm, there is no legal requirement that a pension will provide an income for the rest of your life. Further to this, the law has been altered to give annuity providers greater flexibility thereby hopefully encouraging competition in this section of the market.
These pension reforms will have far reaching positive consequences for UK pensions in general, defined contribution and defined benefit plans in their own way.
Retirement planning is critical to giving yourself the best opportunity to retire in comfort. You will go through 6 stages, from defining your objective to monitoring progress. Part of the process involves choosing appropriate investments based on the level of risk you are comfortable with. Using risk mitigation strategies can allow you to reduce unnecessary risk and potentially increase your investment returns.
With UK pensions soon to offer full flexibility it is important to known your options on retirement and the level of income that you can safely withdraw without your pension savings becoming exhausted.

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Pensions explained written by Liberty Wealth average rating 5/5 - 6 user ratings