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What is a Pension?

What is a Pension?
Published:  22 Feb at 7 PM
A pension is essentially a form of saving that allows an individual to put money aside to ensure that when your retire, you will still have an income to live off in addition to the minimal amount you will be given by the government. Often this will incorporate contributions from your salary which is automatically paid by your employer into the company pension scheme.

The amount you deposit into your pension plan whether it be extra-curricular donations or company contributions will determine the amount you will have to live off when you retire. The way you choose to invest it, the age that you first start withdrawing your pension and the amount an insurance company would be prepared to offer you as a monthly salary for the remainder of your life in exchanged for the saved amount all define how much your income would be.

Some individuals, often in places such as the armed forces and police force have secure workplace pensions which is based on the amount of time that you have worked for the company or in these cases, the amount of time you have been in the army/police etc as well as the amount you earned during your career. Regardless of the type of plan, the United Kingdom provides various tax breaks for pensions. You are eligible for tax relief on any payments you make into a pension plan however this benefit is only for those earning under £150,000 as of 2011. With the exception of the extremely well-off, it is also possible for you to withdraw a quarter of your pension contributions as a tax-exempt lump sum when you retire. This is generally perceived as being the best pension planning option for most individuals who unless they are very well-off, must put money to one-side in order to have enough money to live once they have finished working as it is irresponsible to rely purely on the minimal government provided pension schemes.

There are other options to assist any individuals looking to save money but unfortunately these do come with potential downsides. So pensions are almost exclusively seen as the leading choice for the majority of people, partially due to the various tax breaks that are offered to the pension funds. There are three main pension plan options. The first of these is occupational “final salary” pensions which are provided by the company you work for. The second is the money purchase pension plan, which will come from either the company you work for or from additional earnings for example self-employment. These are frequently referred to as personal pensions. Finally is a state pension which is a government funded one. You may also be entitled to a top-plan in addition to the standard state pension. If you do not have additional savings or minimal amounts set aside for retirement, your pension could be boosted by a pension credit.

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