The UK pension scheme

The pension scheme in the UK has been the subject of recent reforms aimed at making the system more understandable for the consumers to allow them to make the most of it. In fact, it is good to know the basics of the pension system to be able to make informed choices. This is even more interesting for all those workers who want to use their pension to make a good investment (in the medium or long term), such as those who decide to collect their pension income in advance. If you are among them, in this article you will find the information you need to know.

Those who are approaching the basics of the pension system should know that the body in charge of collecting social security contributions, management, distribution, and supervision of the sector is HM Revenue & Customs. This body deals with the collection of direct and indirect taxes, it also has competences in the social security sector and deals with the distribution of family allowances and all other instruments of state subsidy. 

State Pension and Private Pension

Once the retirement age is reached, and with the payment of at least 10 years of contributions, the worker has the right to access the state pension. Upon reaching the thirty-fifth year of contributions, the worker will be entitled to the maximum amount, but it should be said immediately: the amount of the state pension is quite low; in fact, at this moment the basic pension is £141.85 a week. Therefore, it alone is not sufficient for an individual’s needs.

Therefore, it is advisable to provide for a private pension which allows you to supplement the state pension and ensure greater peace of mind. The possible solutions are many and varied. Let’s see some examples.

First, you can activate both an individual pension to manage independently or opt for the activation of one of the plans proposed by your employer. Whatever your choice, the sums of money you will pay for your personal pension will be invested (for example by buying shares) by the institution that provides the pension. The amount that you will then receive will depend on the performance of the investments of the pension fund to which you have joined, as well as on the amount of money you have paid, and the deadline set for your collection.

Types of private pension

Among private pensions, therefore those that can be requested and activated by the worker, we can distinguish two macro-areas:

  • Individual pension

This category includes stakeholder personal pensions and self-invested personal pensions (SIPP); what, at the time of collection, will be received depends on how much has been paid by the worker in the years of contribution and on the degree of risk of the investment. Stakeholder personal pensions are a defined-contribution pension scheme.

With this scheme it is possible to obtain flexible minimum contributions, total coverage of taxes and, often more importantly, it offers a predefined investment strategy. The SIPP regime, on the other hand, offers more flexibility and allows you to control your specific investments.

  • Workplace pension

This scheme has pre-defined pension plan schemes that workers can join. Access to this type of social security treatment is not open to everyone; in fact, only workers permanently residing in the United Kingdom, aged between 22 and the retirement age, and who have an annual income of no less than £10,000 are automatically included in the scheme.

Those who do not have the parameters will still be able to access it voluntarily. The minimum contribution under these pension schemes comes partly from salary money, partly from the state tax bill and partly from the employer. The total amount must be deposited for not less than 10 years.

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