Lots of people think pensions are boring and complicated. But if you understand the basics, then planning for your future and investing in a pension isn't as scary as you may think.
The Scheme is a Defined Contribution (DC) arrangement, which means that you and the Company pay a set level of contributions (money) into your Pension Account while you are employed.
The money in your Pension Account is used to buy units in your chosen investment fund/s. This may be the default Target Date fund or one of the alternative funds available.
The value of these units goes up and down depending on the investment performance of your chosen fund/s.
When you get to retirement, the value of your Pension Account (including contributions from you and the Company, plus any investment return) can be used to provide you with the following:
- A cash lump sum - you can take your whole Pension Account as cash, the first 25% of which will be tax-free. The remainder of the lump sum will be classed as income and will therefore be subject to tax.
- An annuity, which is a contract with an insurance company that pays you an income for the rest of your life. You can also take 25% of your Pension Account as tax-free cash.
You can also take your benefits flexibly either through flexible drawdown or as a series of lump sums. These options aren’t available through the Scheme though, so you would need to transfer your Pension Account to another approved pension arrangement who can provide these options.
If you take your Pension Account flexibly and wish to still contribute to a pension scheme you may be subject to a (reduced) Annual Allowance, known as the Money Purchase Annual Allowance (MPAA). For more information, please click here.