A pension scheme is a way of saving for your retirement so that you have an income after you stop working.
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There are two main ways you can start saving for a pension - getting one through your job or joining a personal pension scheme. You can save for a pension using both types of pension scheme at the same time if you want to.
Many employers have either a company pension scheme that they've set up for their employees or provide access to a group personal scheme. Your employer will also contribute towards your pension.
From October 2012 employers will have to start enrolling their employees into a pension scheme and pay contributions for them.
You can join a personal pension scheme whether you're employed, self-employed or not working. They're set up and run by financial organisations such as banks and insurance companies.
Automatic enrolment into a pension scheme at work - GOV.UK website (Opens new window)
There are lots of different types of pension schemes. The type that you belong to affects the way you can take your pension pot and the way it's taxed. The most common types are:
Each pension scheme is made up of individual pension pots for each member - called pension arrangements. The type of pension arrangement you belong to affects how you can take your pension and how your pension pot is taxed. The two most common types are:
Pension schemes that are registered with HM Revenue & Customs (HMRC) can qualify for tax relief on:
Payments made to members or employers that don't meet certain conditions are classed as unauthorised payments. The member, employer and the pension scheme have to pay tax charges on unauthorised payments.
A pension scheme doesn't have to be registered but most do because of the tax advantages. Non-registered pension schemes don't qualify for tax relief on employee contributions or investment income and gains.
Pension schemes and tax - the basics
You can pay as much as you want into any number of company and personal pension schemes. Each year you can get tax relief on your pension contributions of up to 100 per cent of your UK earnings (salary and other earned income).
If you earn less than £3,600 you'll still get tax relief on contributions up to that amount as long as you're paying into a personal pension or any other scheme that uses the relief at source method for giving tax relief.
This is subject to an 'annual allowance' above which tax will be charged. The annual allowance for tax relief in the 2013-14 tax year is £50,000. If your pension savings for a tax year are more than the annual allowance you may have to pay a tax charge on the excess.
Tax relief on pension contributions
Understanding the annual allowance for pension schemes
There's no limit on the amount of pension savings you can build up but there's a limit on the amount of tax relief you can get over your lifetime. The lifetime allowance is the maximum amount of pension savings you can build up over your life that benefits from tax relief. If you build up pension savings worth more than the lifetime allowance you'll pay a tax charge on the excess. For the tax year 2013-14 the lifetime allowance is £1.5 million.
Understanding the lifetime allowance for pension schemes
You must normally be at least 55 before you can start taking your pension. You may be able to take your pension earlier if you're retiring due to ill health. There's no upper age limit for starting your pension although many pension schemes may expect you to start your pension before you're 75.
Your pension may be paid directly from your pension scheme or you may have to buy an annuity that will provide you with a pension.
When you start taking your pension you're normally also able to take part of your pension pot as a tax-free lump sum.
If your pension pot is small you may be able to take it all as a lump sum if you meet certain conditions.
Taking payments from your pension pot
Certain life events may affect what happens to your pension savings and the amount of your pension pot. These events include:
Pension Schemes and life events
Many pension schemes pay benefits following a member's death. This could be a lump sum, a pension paid to a dependant or a mixture of both. The type and amount of benefit paid normally depends on if you die before or after starting your pension.
What happens to your pension savings when you die
All registered pension schemes must have nominated persons called scheme administrators who are responsible for ensuring the scheme complies with the tax rules, paying taxes and giving information to members and HMRC. Employers who have employees in pension schemes also have responsibilities.
Pension scheme roles and responsibilities
Information requirements for pension schemes
If you're working in the UK but paying into an overseas pension scheme you may be able to get tax relief on those contributions. You can also transfer your pension savings in a UK pension scheme to an overseas pension scheme, but if the scheme or payments don't meet certain rules there may be tax to pay.
If you're concerned that there might be something wrong with your pension scheme or the way it's managed, there are organisations that can help.
Both occupational and personal pension schemes will have their own procedures for handling complaints. Your first step should be to make your complaint using these procedures.
If you're not satisfied after raising your complaint you can take it further.
It's a good idea to go to The Pensions Advisory Service first. This is a free service that can help anybody with a complaint about their pension arrangement. There is also a Pensions Ombudsman and the Financial Ombudsman Service. Their services are free and their decisions are binding.
The Pensions Advisory service (Opens new window)
The Pensions Ombudsman (Opens new window)
