How to navigate the pension maze

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Annuity: This is an insurance contract that pays out a regular income, either for a set period of time or until you die bought with the money from your pension fund. The rate depends on your age, your state of health and whether you want to protect your income from inflation or provide for a loved one after your death. From April 2015, you don’t have to buy an annuity with your pension savings, although you might still want to in some cases.

Auto-enrolment: This is the automatic enrolment of staff in workplace pensions. It began in 2012 with the largest employers and nearly all workers who have not been in a scheme before, will enrolled by 2018. You can opt out, but you will be giving up free contributions from your employer and the tax relief top-up. Employers do not have to enrol you if you are over State pension age or earn less than £10,000 in the 2015-16 tax year. If you earn less than this you can ask to be enrolled provided you earn over £5,824. You will be covered if you are on a short-term contract, an agency pays your wages or you are away on maternity, adoption or carer’s leave.

Deferring: If you delay taking your State pension (so you claim it later) you can boost the amount you receive.

Deferred pension: When you leave a pension scheme (usually when you leave an employer) the scheme administrator will work out the pension benefits you have built up and tell you their value. You can leave the pension where it is (where it will increase in value but often by only the rate of inflation if it’s in a final salary scheme) or you can transfer it to a new scheme (see below).

Defined contribution/money purchase pensions: This is a type of pension where you have your own ‘pot’ and its value depends on how much you pay in and how well your money is invested. They include many employer pensions, stakeholder pensions, personal pensions and SIPPs.

Defined benefit/final salary: These pay a pension which depends on how much you earn at or near retirement and the number of years you have worked for an employer. You can, for example, earn 1/60th of final salary for every year you work – so after 30 years you have 30/60ths or half your salary as pay. The cost of these means that fewer and fewer employers now offer them.

Pension transfer: When you move from one employer to another or want to switch your pension from one pension provider to another, you need to transfer your pension (rather than cashing it in and re-investing it). This ensures you do not lose the tax benefits.

SIPP: self-invested personal pensions allow you to take control (they may also be called DIY pensions), choosing your investments and reviewing your own portfolio of funds. However, don’t worry – you don’t actually invest the money yourself. Instead you select funds (usually from a carefully selected, but wide range) and the fund manager does the actual investment for you.

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