What is a pension pot?

September 15, 2020

‘Pension pot’ refers to the savings you build up in a certain type of pension known as a ‘defined contribution’ pension scheme. You and your employer (if you are employed) pay into the scheme and this builds up a ‘pot’ of money over time, which you can use to give yourself an income when you decide to stop working.

There are three main types of pension:

  • Defined Contribution pensions
  • Defined Benefit pensions
  • State Pension

Defined contribution pension

With this type of pension, you build up a pension pot which you can take an income from when you stop working. But you must be aged at least 55 (or 57 from 2028) before you can access any funds. With this type of pension scheme, you can usually withdraw at least 25 per cent (a quarter) of your fund tax-free.

The size of your pension fund depends on:

  • How much is paid into the scheme
  • The charges within the pension
  • how well the underlying investments perform

Defined benefit pension

If you work in the public sector or for a large company it is more likely that you will have a Defined benefit pension (DB) Scheme.

These are linked to your salary and when you take your benefits they pay a fixed amount that increases each year.

The pension you get is based on how much you earn and how long you’ve been a part of the scheme. There are various permutations and can be a very complex area.

State Pension

You build up your State Pension by making National Insurance contributions during your working life.

The State Pension is paid by the government and is a secure income for life which increases by at least the rate of inflation each year.

In some cases you can do this even if you are not working, such as when you’re bringing up children or claiming certain benefits.

For the current tax year 2020-21 the full new State Pension is £175.20 per week. However, you might be entitled to more than this if you have built up entitlement to ‘additional state pension’ under the old pre-April 2016 system.

To be eligible for the full State Pension you will need 35 qualifying years on your National Insurance record, and at least 10 years to qualify for any at all.

Summary

As you can see, this is a wide ranging and complex area, and as Independent Advisers, we can help you navigate the issues surrounding pensions.

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