What is a pension?
Pensions are a form of long term savings, that also introduces you to the world of investments, albeit indirectly. Pensions are designed to help you save money and to provide an income in later life, when you decide to give up work, and retire.
Most pensions have favourable tax treatment, compared to other forms of savings, meaning your pension pot growth, is a combination of a tax boost (tax relief) when you save, capital appreciation as assets grow, and dividend income and interest payments from shares and bonds, all of which, grow free of income and capital gains tax each year until you retire.
Pensions have become a lot more popular and widespread these days, following the Governments introduction of “Auto-enrolment”. This makes it compulsory for employers to offer a pension to nearly all employees, and to also make a certain level of contribution.
It makes sense to put some money away for when you’re older, and that’s exactly what pension schemes enable you to do.
You save a little of your monthly income regularly throughout your working life, and the eventual “pot” you accumulate, will provide you with an income in retirement.
Having a pension is an important part of becoming financially independent, and therefore we will discuss the SIPP, (Self invested Personal Pension) here, but for now, we will just summarise the basics of some other pension types for reference.
Different types of pensions