1. How do I start a private pension if I’m self-employed?
Starting a private pension when you’re self-employed is a smart way to secure your future, allowing you to build your pension wealth. It’s a straightforward process that begins with choosing a pension provider.
You could choose from an insurance company, a bank, or a specialist pension provider. Make sure to compare the different providers first, paying attention to their fees, investment options and customer service.
Once you’ve chosen a provider, the next step is to decide how much you want to contribute to your pension. These contributions are a form of pension saving and can be a fixed amount or a percentage of your income.
The more you contribute, the larger your pension pot will be. It is vital to review your contributions regularly and increase them if you can to optimise your funds.
2. What are the different types of workplace pensions?
Workplace pensions are set up by employers for their employees. There two main types of workplace pensions are defined contribution pensions and defined benefit pensions.
In defined contribution pensions, the money you spend at retirement depends on how much has been contributed and how well the investments have performed.
On the other hand, defined benefit pensions promise a specific income at retirement, which might be linked to your salary and how long you’ve worked for your employer.
However, the income you’ll receive with this is independent of investment performance. Although these pensions are less common nowadays, some employers may still offer them.
3. Can you explain how private pensions work?
In a nutshell, private pensions are a type of savings scheme specifically designed for retirement. You, and possibly your employer, make regular contributions into the scheme.
These contributions are then invested to grow the pension pot over time, providing you with more savings to live off during retirement.
However, the amount of money in your pension pot at retirement, depends on the amount of money saved and how the investments have performed.
You can usually start taking money from your pension pot at age 55. You can take it as a lump sum, buy an annuity to provide a regular income, or use income drawdown to take out money when needed.
4. What happens to my pension if I’m in poor health?
If you’re in poor health, you can access your pension earlier than the normal retirement age.
This is known as taking your pension on grounds of ill health, exact rules depending on your pension scheme. Generally, you must be able to prove that you’re physically or mentally incapable of continuing your current job because of your illness.
If your health condition is serious and you’re expected to live less than a year, you might be able to take your entire pension pot as a tax-free lump sum. This is known as a serious ill-health lump sum.
5. What happens to my pension if my civil partner or spouse dies?
If your civil partner or spouse dies, you might be eligible to receive some of their pension money. The amount you’ll get depends on the type of pension they had and the rules of their specific pension scheme.
For defined contribution pensions, you’ll usually inherit whatever is in the pension pot. You’ll typically receive a fixed income for defined benefit pensions, which could be a fraction of your partner’s promised pension.
If your partner was below their scheme’s pension age or 75 when they died, the pension you inherit is typically tax-free. If they were above their scheme’s pension age or 75 when they died, any income they get from their pension is usually taxed at the basic rate.
It is recommended to seek advice from a financial adviser, as the rules around these schemes are not always straightforward, This is because they can offer support in explaining private pensions.