Pension contributions are the retirement plan for the future by putting something aside to live on when you grow old.
The main idea with a pension is when individuals get old, they have less strength to work compared to when they were younger.
To explain pension easier, Our Northampton accountants have classified it into 3 categories:
State pension contribution in the UK
This is the income an individual will receive from Revenue when they get to pension age.
The state pension age for taxpayer’s ranges from 65-68 years.
The amount a taxpayer receives will be based on the national insurance contributions they have contributed in their working lifetime.
To know how much state pension contributions you have, kindly click.
If you will like to know more about the national insurance click
Is state pension contribution taxed?
Pension income is treated as normal income.
Therefore taxpayers will pay tax based on the amount they receive as pension and their other income in a tax year.
The other main ways of providing for the future is
Occupational pension and Personal Pension scheme:
The employer will set up a pension scheme with a pension provider and make contributions to taxpayers in future.
There are three main types of contribution:
The defined benefit system:
This is a pension scheme where the employer promises to pay an employee a certain amount of pension at the time of retirement.
The employer will set this scheme up and ensure they put enough money to ensure they pay the amount they have promised the employee.
It’s usually based on the final salary of the employee.
The defined contribution system.
The employer and the employee will both contribute to the pension fund on a regular basis.
The amount the employee will receive will depend on the growth of the investment.
The major difference between the two-pension scheme.
Under the defined benefit scheme, an employer will promise an employee a certain amount at retirement based on final salary.
However, under the Defined contribution system; there is no certainty in the pension that the employee will receive at retirement.
Hybrid Pension Contribution:
This has features of both defined benefit and defined contribution schemes.
Personal pension scheme
This is usually to complement their other pensions or to provide a pension in future because they don’t have one currently.
The income that will be received in future will be based on the amount they have contributed to the pension scheme.
Also, it would be based on the investment from the pension.
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