More people than ever in the UK are saving into one…but what exactly is a pension plan?
In short, it’s a way of saving for your retirement.
There are different types of pension plans.
A personal pension plan is one you open yourself, while a workplace pension plan is set up by your employer.
So how do they normally work?
Well, you pay money into your plan. And if it’s a workplace one, your employer normally pays in as well.
The government usually then adds a bit extra to your pension savings – known as ‘tax relief’.
How much tax relief you can get depends on how much income tax you pay.
Say you pay income tax at the basic rate of 20%.
To have £100 paid into your plan, it’d actually only cost you £80.
The other £20 would come from the government.
If you’re a higher or additional-rate taxpayer, you need to claim back anything over 20% from the government. You can do this by either writing to HMRC separately, or through their annual self-assessment tax return.
Depending on the kind of pension plan you have, you could get tax benefits in a slightly different way rather than tax relief.
A key thing to remember is that money paid into your pension plan is invested, which means it has the opportunity to grow over time.
But don’t forget that your investments can go down as well as up and you could get back less than was paid in.
When the time comes, there are a number of ways you can take your pension savings and you can choose the way that suits you best. You’ll usually get 25% of your plan’s value tax-free.
Pension plans are designed with the long-term in mind.
Your payments, any employer payments, any tax benefits and potential investment growth can all add up and can help you save for the retirement you want.
Laws and tax rules can change and will depend on your own circumstances, including where you live in the UK.
