Private pensions Part 1: What do I do with my pension savings?

Your pension savings could be very significant. That means it’s important to make the right decisions.

What are my ‘pension savings’?

These are the savings you have made over the years in pension plans. Most people will have built up their pension savings through schemes run by the companies they’ve worked for, but some people may have paid into individual pension plans during their career.

There are many different types of pension plan and they go by different names. You don’t need to know precisely what type of product you have at this stage, all you need to know is whether it is a ‘defined benefit’ or ‘defined contribution’ plan. These expressions may not mean much to you, but the explanation below should help you identify what type of scheme you are in:

Defined benefit

Defined benefit plans are often called ‘final salary’ pensions. This is because they commonly provide a proportion of your earnings close to retirement. For example, they may pay 1/60th or 1/80th for each year of service.

Some plans calculate benefits based on the average salary you receive over the time you worked for the employer (commonly called ‘career average’ schemes).

Defined benefit plans were very popular, but many have now closed to new members.

Defined contribution

These schemes are often called ‘money purchase’ plans. They include SIPPs, personal pensions and stakeholder pensions.

In these plans, money is usually paid into the plan by you and/or your employer. At the point of retirement, there is a pot of money based on how much has been paid in plus any growth on the money (less the costs of running the scheme).

Of course, during your career you may have spent time in both defined contribution and defined benefit plans.

Whatever the type of pension plan, the first decision you have to make is whether or not to take part of your benefits as a tax free cash sum.

Private pensions Part 2: Tax Free Cash

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