Workplace Pension: How Does It Work?

A piggybank sign and a phone investment app

Nowadays, UK residents have at their disposal a long list of pension plans which differ from each other in some important characteristics. In 2022, one of the most popular plans is the workplace pension, which is also called occupational pension or company pension. As the name suggests, the workplace pension has been specifically designed for employees and it works differently than other available schemes. By choosing this kind of pension, your employer will monthly contribute to your pension fund and help you build your pot. Every month, both you and your boss with deposit a minimum percentage of your salary. The Government will contribute too by applying tax relief. Basically, it is a pension scheme designed to help you build your fund by being paid a little more every month.

If you’re wondering “can I withdraw my pension?” you should know that a very strict rule has been set in this regard. In the UK, the money you monthly deposit won’t be eligible for withdrawal until a certain date, which for the workplace pension is set at 55 years old. The retirement age has been set to help you build a significant amount to which you’ll be able to live on when you stop working, and also to eliminate the temptation to withdraw before you actually need the money. The workplace pension also comes in two different types: the first one is called defined contribution pension scheme, which is the most common one.

By choosing this scheme both you and your employer will monthly deposit a minimum sum to build your fund. They money you put in it will be later invested by the pension provider. This means that the amount you get will only depend on how well the investments perform. On the other hand, the defined benefit pension scheme will give you access to a pre-established sum as soon as you turn 55.

How many pensions are available in the United Kingdom?

Even though the workplace pension is definitely the most common type of pension, it isn’t the only one available for UK residents. As a matter of fact, there’s also a special kind of retirement plan which has been intended for independent workers. It is the case of the private pension, which gives the holder the autonomy to choose how often to deposit and how much to put into the fund. On the other hand, the state pension is a particular retirement plan which will give you free access to your money as soon as you reach the retirement age. In this case, the date has been set at 66 years old and the sum you get will only depend on how much you deposited every month and also on your contributions.

How do retirement trusts work in the UK?

Every plan available is intended to help you build a fund to which you can live on during your life after work. Although every retirement scheme is unique and different from the others, there are a few guidelines that comply to every one of them. For instance, a retirement age has been set for every scheme available. In addition to that, you will always be able to count on the contribution of the Government, which will always apply tax relief no matter the type of fund you decide to open.

Lastly, you should never forget that when you deposit your savings on a pension scheme, they will always be invested. The amount you get when you stop working will depend on how the single investments have performed. This means that the chance to get less than what you deposited is always around the corner, so you should also take into account the risks that come when investing into a pension fund.

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