The pension system in the United Kingdom is one of the oldest and most complex systems in Europe. It was developed by entrepreneurs in the form of pension funds at the very beginning of the industrial revolution. As the funded pensions have historically dominated the country for a century, most of the pension burden rests on the shoulders of private sector employees and employers through private insurance.
The retirement system may appear very complex, which is why we have created this guide to help you and your loved ones understand it a little better. This guide is dedicated to people already retired as well as those preparing for retirement.
The Different Types of Pensions: Some Facts to Keep in Mind
To begin with, it is important to examine the different types of pensions in detail. Even if the information may seem obvious, it is sometimes interesting to have an overview to understand the subtleties and differences.
There are three main types of pension:
- State Pension (Public)
- Defined Benefit Pensions (Private)
- Defined Contribution Pension (Private)
What is the State Pension?
Most people can claim the State Pension when they reach state pension age. It is possible to find out your State Pension age by using this calculator on the government website. The State Pension is paid by the government and is a guaranteed income until death. The amount received increases accordingly with the rate of inflation each year. Altogether, a person at retirement age would need 35 years of National Insurance records to be eligible for the full State Pension.
The State Pension received depends on the contributions made to National Insurance during working life. Sometimes, even when an individual does not have any professional activity, they can still contribute, for example when they are bringing up children or claiming certain benefits.
For the people thinking about retiring soon, it is important to know that since April 2016 a new flat-rate State Pension was introduced. For 2024-2025, the full State Penson is £221.20 per week. Your loved one could be entitled to more, especially if they’ve accumulated the right to “additional pension” before the new flat rate came in.
Four months before State Pension age, a person can claim their pension or defer it. You don’t have to do anything for the latter, and the pension amount will increase by 1% for every nine weeks you defer.
What is the Defined Benefit Pension (DB)?
Most elderly people who are receiving this pension are those who retired from the public sector or worked for a very large company. Like the State Pension, the Defined Benefit Pension is a guaranteed income for the rest of a retiree’s life.
Your employer contributes to the scheme, but you can also contribute as well. However, the employers are responsible for ensuring there is enough money at the time their employees retire to pay for the entirety of their pension income.
Pensions are based on:
- The number of years you have been contributing to the scheme.
- Earnings. Your salary at the point of retirement, or the average salary over a career.
- The share of your earnings you will get as a pension each year.
This pension has its advantages. For example, if your retired parents receive this pension, but unfortunately your father has passed away, your now widowed mother will continue to receive your father’s pension for the rest of her life.
DB schemes are among the most secure pensions. They’re generous and the income paid each year to the retiree increases in line with inflation. Unfortunately, as people live longer, DB pensions are now considered too expensive for companies. Therefore, companies tend to offer them less.
What is the Defined Contribution Pension (DC)?
Also called a “money purchase” pensions scheme, this pension is based on how much is paid in, how well the investments you have made are doing, and how you decide to take the money: in a lump sum, smaller sums, or regular payments.
You also need to keep in mind that the pension provider takes a small percentage of your pension as a management fee. It is worth asking how much this percentage will be so you can have an idea of how much money you are really getting at the end.
Some defined contribution schemes allow its members to choose the level of contribution they want to pay. So once again, it is worth checking with your pension if you want to shape it to your needs.
However, with this pension, it is not possible to know in advance what pension benefits an individual will receive, as it completely depends on how much money has been added by the person at the retirement date.
How to Review and Manage Your Loved One’s Pension
This part of our pension guide is more relevant to your elders and parents who are already retired. It explains how to manage their small pension or even review it if they think that something is not quite right in the sum received.
Make a Budget
When your loved ones retire their income tends to decrease. Their expenses, however, should also have decreased as mortgages are usually paid off, and generally they no longer have any dependent children. However, it is not always easy for your elderly relatives to cope with this sudden change in their lives and income. It is therefore more prudent to establish a budget of their expenses, to know how much they really spend per month or per year.
Online tools can help to calculate this budget. This is a good way to figure out how much money they can spend. If they are over-spending, it’s a great way to see how and where they can adjust their expenses. If you want some more advice to help your relatives save some money, have a look at our helpful articles: ‘10 Ways to Save Save Save!‘ and ‘How to Reduce your Bills‘.
Track Down Their Different Pensions (Personal or Workplace)
It’s easy to forget about a specific pension, but it’s essential to track down these potential leads because it could make a real change in the budget of a retiree. To find out about any old pensions that could have been forgotten, you can contact the Pension Tracing Service on 0845 6002 537.
Don’t Forget to Claim the State Pension
Your loved ones might have contributed for a private pension later in their work life, but the State Pension is the foundation of retirement savings and you must claim it because it won’t be paid automatically. They could also be entitled to other retirement benefits such as Pension Credit. It’s worth doing your research so you don’t miss anything.
Their House Might Be a Source of Income
If your loved ones are home owners, it can represent a big share of their wealth. To turn this into a profit, they may be able to obtain a portion of this value using equity release. Equity release means that people over 55 can access the “cash” tied up in their home. The money can be received as a lump sum, in several amounts, or a combination of these two options. If your loved ones are in need of money, it is worth trying this option, and having a look at what the equity release can really offer.
If they’re not tempted by this option, they can rent a room in their accommodation. This is a good way to generate a regular income and the Rent a Room scheme implemented by the government allows them to get the first £7,500 a year tax free.
A Good Way to Use Your Pension: Invest in a Careline Alarm
One of the best ways for your loved one to use their pension would be to consider getting a Careline Alarm. Home care can be expensive, and the alarm allows for your elderly parents to live independently in their own home.
Take a look at our website if you would like to find out more about the alarm and different price packages. If you have any questions, don’t hesitate to get in touch with our Customer Service team on 0800 030 8777, or by sending an email to info@careline.co.uk.
Editor’s Note: This article was updated on 10th May 2024 to reflect current information.
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