Pension Contributions

What are pension contributions?

Pension contributions can work in a number of ways, but the general idea is that you contribute pension contributions into your pension on a monthly basis for the majority of your working life.

You pension fund will grow, and be invested throughout your life, and when you come to retire you will be able to use your pension fund to buy an annuity. An annuity is an insurance product, offered by insurance companies, which guarantees you a monthly payment every month for the rest of your life. This is what you will refer to as your pension.

Some pensions work in a slightly different way, which is why not all pension contributions are the same. Final salary pensions for example work slightly differently in that you do not buy an annuity, but are simply paid monthly payments by the pension fund of the company you worked for.

Final Salary pensions will pay you a percentage of your final salary, based on how long you worked for the company. These are very well paid, and as a result expensive to run. The number of final salary pensions in the private sector is reducing rapidly, and even the gold plated public sector schemes are currently under review.

How do I make pension contributions?

Again pension contributions depend on where and how you work. If you work for a company with an occupational pension scheme, i.e. they run or provide a pension for you, and then you will make contributions straight from your pay. Often a company will make pension contributions on your behalf, if you make them as well. You can either contribute a fixed amount a month, or a percentage of your monthly salary. Your pension contributions will come out before any tax is paid, as pensions are a tax free luxury, up to a limit of several hundred thousand pounds a year.

If you are self employed, or have opted to choose your own private pension’s scheme then you can make pension contributions yourself, usually by direct debit, and the pension company will then claim the tax back you will have paid on your wages, and will add this to your fund.

Pension contributions are very important, and saving for your future as soon as possible will prevent you from living in poverty in retirement. Whilst the state pension provides an income of sorts, many people will find it is nowhere near enough to live off.