Pensions
What is the difference between a DB and a DC pension?
A defined benefit (DB) pension (also known as ‘final salary’ or ‘career average’) is a type of workplace pension. It gives you an income based on your salary, length of service, and a calculation made under the rules of your pension scheme. With this type of pension, your employer guarantees a certain amount each year when you retire.
A defined contribution (DC) scheme is a personal or workplace pension based on how much money has been paid into your pot. They are sometimes referred to as ‘money purchase’ schemes. When you take money from a defined contribution pension it comes from the money you (and sometimes your employer) saved into it over the years, plus any investment returns your money may have earned. With defined contribution pensions, you can decide how you take your money out.
If I cash in my pension pot, how much tax will I pay?
When cashing in a pension pot you will usually get 25% tax free. The remaining 75% is taxable and it will be added to any other taxable income you have in the tax year. Adding a large cash sum to your income could mean that you move into a higher tax rate. It could also affect your entitlement to any benefits.
It is therefore important that you understand what your income in a particular year may be. Remember that sources of income include: • The State Pension • Payments from private pensions (not including any tax-free cash lump sums you may have received) • Earnings from employment or self-employment • Taxable State benefits • Other income, such as money from investments, property or savings
Pension providers will often have to deduct emergency tax when pension payments are made, which may result in an over or underpayment of tax. Your provider should give you information on how to claim back any overpaid tax.
What is a guaranteed annuity rate and what are the options you can attach to an annuity?
Some pension policies have a feature known as a ‘guaranteed annuity rate’ (GAR). It is likely to provide you with a better deal than what would currently be available in the annuity market if you were to buy one today, and is therefore a valuable benefit. You should check whether the terms of your GAR are suitable for your circumstances, and if your fund value is over £30,000 you will need to take independent financial advice before your provider will allow you to convert or transfer your pension.