What is a pension?
A pension is an amount of money rewarded to an individual based on his or her working experience. These pensions are usually issued by companies in which the employee worked for during a specific period of time, though pensions can also be issued by insurance companies, trade unions, or the government depending on the state and terms of the individual’s working history.
Pensions having to do with retirement are referred to as Pension Schemes in the United Kingdom, but in the United States of America, they are referred to as retirement plans.
Pensions in the United Kingdom usually tend to have higher rates of interest and payoffs than those in the United States because workers in the United States tend to work fewer years than the average United Kingdom worker.
Normal pensions are paid by companies or third parties to the employee based on a predetermined retirement agreement. However, there are several other forms that a pension can take apart from this Employer Pension.
These include a state pension in which the government pays the pension if the individual is unable to work due to a disability incurred, and self-invested pensions in which the individual saves up personally for retirement in a special account, called a Self Invest Pension Plan (SIPP). With a SIPP you can invest in cash or shares or bonds, you are in control of your retirement portfolio.
Pensions Rules and Benefits
Pensions are based on a number of factors and equations that are combined to get the rate as well as the length of time in which the pension takes effect. Pensions are usually based on former annual income of the employee, amount of time spent working at the company, the age of the employee, and the rank of the employee at the company. Normally higher executives get a larger pension than a lower worker.
As with all financial products there is regulation. In the UK The Pensions Regulator regulates worked based pension schemes.
The chief benefit of having a pensions is giving a employee the ability to live well once he or she is incapable or unable to work at a company any longer. Though, this does not have to be the case, as many companies pay pensions to individuals even if they can work. This is determined by the length of time in which the employee worked at the company.
If you are thinking of taking a bit of money out of your pension early then you should read our detailed article entitled ‘can I cash in my pension?‘.
As of October the implementation of new legislation will oblige employers to engage in auto enrolment pensions. Make sure you’re prepared for this!