Pension FAQs

Here are some frequently asked questions and their answers which may also assist:

What does 'contracting out' mean in relation to the Additional State Pension?

The UK Government's Directgov website provides a good explanation of this as follows: "Some pension schemes are set up to provide a pension instead of all, or part, of the additional State Pension. This includes some company, stakeholder and personal pension schemes. When you join one of these pension schemes, you are said to be 'contracted out' of the additional State Pension. While you are contracted out, you will not normally build up additional State Pension, but you are compensated for this, depending on the type of scheme you are in:

if you are in a company or occupational pension scheme, both you and your employer pay a reduced rate of National Insurance contributions.

if you are in a stakeholder or personal pension scheme, you pay full rate National Insurance contributions but the government pays part of those contributions into your pension scheme for you. Contracting out of the additional State Pension does not affect your basic State Pension. It is not possible to contract out of the basic State Pension. From 6 April 2012 you will no longer be able to contract out of the additional State Pension through:

• a personal or stakeholder pension scheme
• a company or occupational pension scheme which is contracted out on what is called a ‘money purchase’ or ‘defined contribution’ basis.

If you are in a company or occupational pension scheme, your employer can tell you if it is contracted out on a ‘money purchase’ or ‘defined contribution' basis. If you are contracted out through one of these schemes on 6 April 2012, you will automatically be brought back into the additional State pension. You will begin to build up entitlement to the additional State Pension from this time."

 

Is there a limit on how much I can put into a pension scheme?

There is no limit to how much you can contribute to salary related or money purchase schemes BUT you will only get tax relief up to certain amounts, these limits as at 2010/11 tax allowances are up to 100% of your earnings (and then up to an annual maximum of £255,000 - this is set by HM Revenue and Customs and changes each year). There is also a lifetime allowance which limits the amount you can accumulate free of tax in all your pension funds when you come to draw your benefits. This is currently £1.8m, you have to pay tax on any excess over the £1.8m allowance.

Salary-related pension scheme benefits are given a value which counts towards the £1.8m lifetime allowance. Any amount above the lifetime allowance can be paid as a pension benefit but is subject to tax of up to 55%. You may still have to pay tax on your income when you start to draw the pension.

 

What is Pension Credit?

The Pension Credit is not a pension but a means tested benefit which was introduced on 6 October 2003 and replaced the Minimum Income Guarantee (Mig). It is administered through the Government's Pension Service. The Pension Credit is designed to help pensioners on low incomes who have some savings. The benefit is split into two parts:

• The Guarantee Credit - can be claimed by pensioners who are 60 or over. Low income pensioners who claim this may also get help with council tax and housing costs.
• The Savings Credit - can only be claimed by pensioners who are 65 or over and rewards pensioners who have a second pension or modest savings.

 

What does it mean when a pension is 'frozen'?

The term 'frozen' can refer to an an occupational pension scheme where pensions owned by employees who no longer work for the sponsoring employer are 'frozen' until retirement age. Frequently, if the amounts are small, the member and the scheme administrators lose touch with each other, and as a result the pension is never claimed. The term 'frozen' can also relate to state pensions where the UK Government can 'freeze' state pensions for pensioners who live in certain overseas countries. Not all countries are included in the "frozen" list, most Commonwealth countries are included in the frozen list, and some non-Commonwealth, non-European countries.

Countries on the list mean UK pensioners get the same indexation as pensioners resident in Britain. All British State pensioners receive their pension based on the level of their compulsory contributions to the National Insurance Fund, and as payments are made within the UK they are all at the same level. However, if the beneficiary moves abroad, their level of pension is dependent on where they live.

 

What is the Pension Protection Fund?

Like The Pensions Regulator, this is a non-departmental public body established by the Pensions Act 2004. The Pension Protection Fund (PPF) is a compensation scheme for members of eligible defined benefit pension schemes where the sponsoring employer becomes insolvent and the scheme is underfunded.

 

Download the UK Pension PDF Guide here - see our other free PDF guides here

Guide Contents

What is a Pension?
Why do you need a pension?
State and other types of Pension Schemes
Company or occupational pensions offered by Employers
Personal or private pension schemes
Shopping around for a personal pension scheme
Pension FAQs
Where can I go to get more help?

main menu << previous page  next page >>