What is a pension?

A pension scheme is a type of savings plan that can help you save money for later on in life.

Most pension schemes receive tax relief on personal contributions, but a workplace pension scheme allows you to benefit even further because your employer also contributes.

What is a defined contribution pension?

Defined contribution pensions build up a pension pot using your contributions and your employer’s contributions (if applicable) plus investment returns and tax relief.

If you’re a member of the scheme through your workplace, then your employer usually deducts your contributions from your salary before it is taxed.

If you’ve set the scheme up for yourself, you arrange the contributions yourself.

The fund is usually invested in stocks and shares, along with other investments, with the aim of growing it over the years before you retire.

You can access and use your pension pot in any way you wish from age 55.

• Take your whole pension pot as a lump sum in one go. A quarter (25%) will be tax free and the rest will be subject to Income Tax and taxed in the usual way.

The size of your pension pot and amount of income you get when you retire will depend on:

• How long you save for
• How much you pay into your pot
• The choices you make when you retire
• How much you take as a cash lump sum
• How well your investments have performed
• How much your employer pays in (if a workplace pension
• Annuity rates at the time you retire – if you choose the annuity route
• What charges have been taken out of your pot by your pension provider

What is defined contribution pensions?

Defined benefit pensions pay out a secure income for life which increases each year.

Your employer contributes to the scheme and is responsible for ensuring there’s enough money at the time you retire to pay your pension income.

The income is based on

• How long you served in company?
• What was your final salary? 

State Pensions

Eligibility

You’ll be able to claim the new State Pension if you’re:

• a man born on or after 6 April 1951
• a woman born on or after 6 April 1953

The earliest you can get the new State Pension is when you reach State Pension age.

If you reached State Pension age before 6 April 2016, you’ll get the State Pension under the old rules instead.

Your National Insurance record and your State Pension

The full new State Pension is £175.20 per week.

Your new State Pension is based on your National Insurance record when you reach State Pension age.

You’ll usually need to have 10 qualifying years on your National Insurance record to get any new State Pension.

You’ll need 35 qualifying years to get the new full State Pension if you do not have a National Insurance record before 6 April 2016.

Qualifying years if you’re working

When you’re working you pay National Insurance and get a qualifying year if:

• you’re employed and earning over £183 a week from one employer
• you’re self-employedand paying National Insurance contributions

You might not pay National Insurance contributions because you’re earning less than £183 a week. You may still get a qualifying year if you earn between £120 and £183 a week from one employer.

Qualifying years if you’re not working

You may get National Insurance credits if you cannot work – for example because of illness or disability, or if you’re a carer or you’re unemployed.

For example, you can get National Insurance credits if you:

• claim Child Benefitfor a child under 12 (or under 16 before 2010)
• get Jobseeker’s Allowance or Employment and Support Allowance
• get Carer’s Allowance

You’re not working or getting National Insurance credits. You might be able to pay voluntary National Insurance contributions if you’re not in one of these groups but want to increase your State Pension amount.

Annual increases

The new State Pension increases each year by whichever is the highest:

• earnings – the average percentage growth in wages (in Great Britain)
• prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 5%

Pensions automatic enrolment

Auto enrolment places duties on employers to automatically enrol ‘workers’ into a work based pension scheme. Employers are required to automatically enrol all ‘eligible jobholders’ into a qualifying pension scheme and pay pension contributions on their behalf.

Employer minimum contribution: 3%
Total minimum contribution: 8%

	2020/21 (£)	2019/20 (£)
Automatic enrolment earnings threshold	10,000	10,000
Qualifying earnings band – lower limit	6,240	6,136
Qualifying earnings band – upper limit	50,000	50,000