How are you supposed to understand your pension when many of the things about it seems to be in a different language?
At NOW: Pensions, we want to make saving for the future as easy as possible. We’re here to help with a useful list explaining some of the awkward words you’ll find in the world of pensions. Let’s take a look:
Annual benefit statement
A communication we send you each year giving you a handy snapshot of your pension savings, designed to help you plan for the future you want. It tells you about the savings you have now, and what they could be worth in the future.
It sounds like something to do with cars – but it means your employer must put you into a workplace pension if you qualify. To qualify for auto enrolment you must be between 22 and State Pension age, and earn at least £10,000 a year.
This means putting all your pensions together in one scheme, and could make sense if you’ve got several pension pots in different places. It would make your pension easier to manage and save on charges. To consolidate you’d need to transfer your pensions into one scheme. (This isn’t an easy decision – so if you’re thinking of consolidation it’s worth taking independent financial advice to find out if it’s a good option for you.)
Defined benefit (DB)
A type of pension that gives you a secure income for life, based on part of your salary and the number of years you build up the pension while working for your employer.
Defined contribution (DC)
Most of us with a workplace pension have this type of pension. You build up pension savings based on contributions from you (and your employer if it’s a workplace scheme), and investment returns. When you retire you decide how to take your benefits – for example, all as cash, as cash in chunks, or as an income.
Expression of wish form
This form tells us who you want your pension savings to go to if you die before you take them. It’s important to complete it and keep it up to date so it continues to reflect your wishes.
You pay income tax if you earn more than the income tax personal allowance. The standard personal allowance is currently £12,570 a year.
- If you earn more than £12,570 but less than £50,270 a year, you pay the basic rate of income tax – 20% – on the amount over £12,570.
- If you earn more than £50,270 you pay a higher rate of income tax – 40% – on the amount over £50,270.
(This applies to England, Wales and Northern Ireland – the tax rates in Scotland are different.)
Marginal tax rate
This is the highest rate of income tax you pay in a tax year. So if you normally pay tax at 20%, that’s your marginal rate. If you earn enough in the next tax year to pay tax at 40%, that’s your marginal rate for the year.
In England, Wales and Northern Ireland there are currently three marginal tax rates: 20%, 40% and 45%. In Scotland there are five: 19%, 20%, 21%, 40% and 46%.
Learn more about income tax and tax rates at gov.uk/income-tax-rates
We’re one of these – it’s a scheme that looks after DC pensions for lots of different employers.
Opting out – and stopping contributions
If your employer enrols you in their workplace pension and you don’t want to stay in it, you can ‘opt out’ of the scheme in the first month of being enrolled. Your contributions will be refunded.
You can still stop paying into your workplace pension at any time, but if it’s after the one-month opt-out period, you can’t get a refund of your contributions. They will stay invested until you transfer them to another pension provider or take your retirement benefits.
This means you don’t pay income tax on your pension contributions. The amount you would have paid in income tax goes into your pension savings instead.
In our Scheme, this is because we use a ‘net pay’ arrangement where your contributions come out of your pay before income tax is taken off.
You might think a tax year would be the same as a calendar year – 1 January to 31 December. In fact, the UK tax year runs from 6 April to the following 5 April.
When you transfer your pension savings, you take them out of one pension scheme and put them into another. You might do this for consolidation.
We hope this has helped make pensions less scary and confusing. We explain how your pension works in this short video and how to get help to plan the kind of retirement you want here.