Entries in category Pension

The Importance of Pension Insurance

Pension is a retirement plan in which the person makes long term savings to provide him with monetary support when the salary stops. So, pension provides you with an income when the salary stops to help you live the lifestyle you were living or want to live. UK has state pension plans which have been in place for more than 100 years. The occupational pension plan has been for even longer and was first recorded in the year 1670. Pension plans are very necessary as it helps people to live a stress free life without worrying about money even when their salary stops.

The pension insurance is a scheme in which the working people make contribution in lieu of some benefits. The importance of pension insurance is:

  • It allows you to invest a part of your salary towards use in future. It is of great help in the old age when other sources of income are nil.
  • The pension is provided by the state as well as by the employer and is known as occupational pension insurance.
  • The state pension scheme helps the people with no income or low income to live their life without any problem. Men and women can claim their basic state pension if they have reached an age of 60 and 65 respectively. The retirement age is now being made same for both men and women and hence will be the cause of great change in the future.
  • The occupational pension is provided by the employer where you working and is of great help once the employee is no more working.

The pension insurance scheme is applicable only if the insured belongs to Great Britain or Northern Ireland. However, under certain circumstances the insured is allowed to make contribution towards the pension insurance when he or she is working outside Britain. The pension insurance scheme can be availed if:

  • The potential insurance seeker is working and is within the pension age and also earning an amount equivalent to the primary threshold.
  • You cannot contribute to pension scheme if you are below 16 years of age
  • The contribution to the pension scheme ends the day the insured reaches the pension age as declared by the state.
  • Depending on your earnings you may have to pay class 4 contribution even if you have reached the pension age.

The Cost of Pension Insurance

The pension is a necessity for living a life style of your choice and for that they require a decent income after retirement. According to a report the workers will need to save several hundreds of thousands of pounds so that they will get a decent income even after retirement. Joseph Rowntree Foundation experts says that if a person has to get an income of £16,400 they will require to save £2,70,000 in their savings for pension and this will also supplement their pension of £144/week by state for single tier. This lump sum amount which you save can be used to buy you an annuity income of £8912 which is index linked and the state pension of £144/week will add up to £7488/year and added together will reach the threshold of £16,400.

If a person does not entitle for state pension he would require saving of £480,000 to achieve the threshold income recommended by Joseph Rowntree Foundation. A person needs to contribute to the national insurance for at least 10 years to get entitlement for state insurance according to the new single tier system. However, in current scenario if a person makes a year of contribution to national insurance he will be entitled to some part of the state pension.

If you require a retirement income equal to the minimum wage of £12070, a person would require a lump sum amount of £130,000 for those with entitlement to the state pension. For those with no entitlement to state pension will require a lump sum saving of £340,000. The living wage outside London is £14,527 and to achieve this with state pension entitlement you need saving of £190,000 and without state pension you will need saving of £400,000. In London the living wage is £16,672 and to earn an income similar to it after retirement you would require £280,000 along with state pension and £490,000 if you do not have entitlement to state pension.

If someone thinks of getting a wage similar to national average of £25,496 then they would require a saving of £550,000 if they have entitlement to state pension and if one is not eligible for state pension he would require a saving of £760,000. These figures are not imaginary but were calculated by one of the insurance companies that provide SIPP plans. Pension is a must for all to live a decent life style even after retirement.


Pension is a kind of regular payment which is paid to the person after his retirement from a fund to which the employee or the employer has provided when they were working. In United Kingdom or UK the pension falls into three major divisions and seven sub divisions.

  • State pensions
  • Occupational Pension and
  • Individual or personal pensions.

From the year 2012 to it is added the automatic enrolment, personal accounts and the minimum contribution from the employer.

The state pension is provided by the government so that poverty can be avoided at an old age. However, till 2010 the men aged 65 and above and women above 60 were eligible to claim state pension plan. In April 2010 the age was made at par with men for women as well to claim for state pension. It is estimated that by 2046 or sooner than that the retirement age will increase to 68.

State Pension: The state pension age for men and women by the year 2018 will be 65 and the pension amount will be GBP 107.45 per week in the year 2012/13 Tax year and from April 2013 it will be GBP 110.15/ per week till April 2017. So if you are going to attain retirement age before April 2017, you can claim this basic state pension.

For married couples and civil partners the basic state pension is:

  • GBP 171.85/week for tax year 2012/13
  • GBP 176015/week from April 2013 to 2017
  • Only one of them qualifies for this state pension plan.

How much amount of this basic pension you get depends upon the number of years that you have spent contributing to the national insurance. In UK it requires contribution for at least 30 years by working, making contribution voluntarily or crediting while caring for the family as well.

The basic state pension increases every year in the month of April and is based on certain criteria:

  • In Great Britain what was the average growth in the wages of the people
  • In the previous September the inflation rate noted by the CPI and
  • 2.5%

By the year 2017 people will be eligible for a basic state payment of GBP 144 in today’s value of money. Some people may be lucky to get more than this if they are entitled for additional state pensions but the qualification age for the same for full payment will be 35 years of contribution to national insurance.

Pension Plan: How does It Work?

Pension is a retirement fund to which the employee contributes for use in the future. Sometimes even the employer contributes to the fund. The government always encourages the people to save money for their old age and hence to boost the savings on pension they provide tax relief of 20% and even 30% through tax returns. There is possibility of transferring your pension amount from one company to another. However, it is advised not to do so as you may not be getting the same return or benefit with your new pension scheme.

  • The pension you get or the growth you get depends on how much you invest. You have the liberty to deposit as much amount as you want. It is flexible and the pension is fully in your control.
  • The value of the pension amount depends on your investment in the same. The value of the invested amount may go up or down and it may become less than the amount you invested. However, this should not perturb you and should look for in the long term and above all you need to know the value of your investment at the time of retirement.
  • The pension money can be accessed from the age of 55. However, it is considered useful to stay longer as there are more chances of growth of pension.
  • While taking up the pension you can access 25% of it as a lump sum amount and that too tax free. The rest amount can be used by people to serve them the income they require to live peacefully after retirement.
  • The money in the pension plan can be used to buy an income which will provide income for you and your dependents after you retire from the job and is called as annuity.
  • The factors that affect the amount that you receive in your income are the value of your pension and also your life expectancy.
  • Another type of pension plan is SIPP or Self Invested Personal Pension in which the pension is kept invested and at the same time you can take income while your pension grows.
  • The amount that can be taken out solely depends on the limit set by the government and is none as GAD limit.

This information provided is just for information and can vary as per the market. The tax relief provided can also change.

Pension FAQ

Pension is a must for people who retire from their job to keep getting money to live a decent life style even after the salary stops. However, you will require making a contribution towards pension schemes from your monthly salary. There are many questions that may pop up in your mind when you start thinking about pension. Mentioned below are answers to some of the frequently asked questions:

  • What is basic state pension after retirement?
    Many of the working people are entitled for state basic pension plans. The pension is given to the people in return to their contribution that they have made towards National Insurance when they were working. The eligible age for a person to get state pension is 65 years for men and 60 years for women which will increase to 65 years for women who retire in between 2010-12 and the age for men will be 68 years.
  • What is SERPS or State Earnings Related Pension Scheme?
    The SERPS is a scheme in which all the employees ahd to make some contribution as an additional state pension scheme between year 1978-88. It was possible to opt out of this state pension program after year 1988 and after 2002 they replaced it with state second pension. The idea was to provide the people with money equal to 25% of their total earnings in the best 20 years of their working life. However, they later reduced the percent to 20 which was now averaged over the entire working life of the individual.
  • What is State Second Pension?
    The State Second Pension was introduced in 2002 in place of SERPS and is very much similar to it except that it has more benefits especially for the people whose earning is very low.
  • What are stakeholder pensions?
    Stakeholder pension was introduced in the year 2001 and was aimed to make the pension scheme still cheaper and all the more accessible. One can take out this pension amount directly or with the help of employer. The least investment required is £20 and in addition to it they do not have any penalties or charges if you stop making payment to the scheme. No charges are there if you like to transfer the money to any other pension scheme. The pension that you will receive will depend on the amount of money in your pension fund and the rate of annuity at the time you retire.

Pension FAQ (Detailed)

Retirement should come with lots of happiness and worry free life. This is possible only when you have a regular income coming so that you are free from any tension. The income that you receive when you get retired is called as pension or retirement income. This is possible only if you have made some savings for the same by buying pension insurance or contributing to National Insurance. Most of the people are eligible to get basic state pension but it may not be sufficient for living and may require investment in some other pension plans as well. More information can be got through various sites providing the same and they also have answers to some FAQs. Mentioned below are the answers to many of frequently asked questions:

  • What is the criterion to get enrolled?
    The employers will enroll the employees if they are eligible for it. If you are not already enrolled for the pension plan your employee will do it if you are above 16 years of age and below 75. If you meet the criteria for enrollment at a later age, say for example you start earning more at the age of 23 your employer will automatically enroll you for it.
  • What is the aim behind the pension plan?
    The aim is that the people have additional saving for retirement other than the state pension. State pension is a fund provided by the state when you make investment in the national insurance. If you want to have income more than the state pension you will require saving more from your salary. If you do not do so you may end up leading a lower standard of life. The government therefore have instructed the employers to automatically enroll the employees for pension plans so that they start saving. However, there is an option to opt out of it but it is recommended for better standard of living after retirement.
  • Who will pay for the pension plan?
    The contribution towards the pension plan goes from your pocket and even the employer contributes towards it. The employers are bound to do this if the employee is earning more than £5668.00 per annum in the year 2013-14. The government contributes by providing tax relief for some and thus the tax that you pay, a part of it goes into your pension plan.
  • How much money can I get from my workplace pension?
    The money that you will get from your workplace as pension can be known from the person who manages pension department in your company. They may also provide you with a pension calculator so that you can estimate the income that you will receive after retirement.
  • Is workplace pension enough?
    If you have workplace pension it means that you have made a move towards living a lifestyle of your choice after retirement. If you think that the money you save under the pension plan will not give you enough income after retirement you can think of contributing more towards it. This can be done by working for longer hours or by having other means of doing the saving. The calculation for the retirement income should be done keeping certain things in mind like:

    • Expenses for running a car
    • Expenses on lunches and drinks with friends
    • Holidays and trips
    • Sports and other leisure activities

    These are only to name a few.

  • What will happen to my workplace pension if I move to another company?
    When you switch job your workplace pension automatically gets enrolled to the pension scheme of the new company. The large employer will immediately enroll your for pension plan if you fulfill all their criteria. The small companies may take time and will definitely follow after some time. The new employer if has the pension plan but do not enroll you automatically then they just may ask for your wish to join in. If they do not enroll it may be due to any one of these two reasons:

    • They may not be requiring to do so or
    • they do not happen to meet the criteria to get enrolled for pension scheme.
  • If due to any reason you start a new personal pension plan then you have the liberty to combine the old and new pension schemes. You can do this or not? The process of doing it will be told by the person who has given the plan. There is possibility of making contribution to the old pension scheme even after leaving the job. You may be required to approach the pension plan giver and ask for the possibility. You may also need to know if there will be a cost involved and if you will get tax relief on the same.

Taking up pension plan is a good move towards a healthy and happy retired life.