Creating a redical new pension
An Eagle Star case study

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Page 3: Types of pension

Pensions can be very complicated - there are many different types and individuals may have more than one. The main sources of pensions are:

State pensions

Eagle Star 3 Image 2These include the basic old age pension, the state earnings-related pension scheme (sometimes called SERPS) and for people who began their working life between 1961 and 1975, the graduated retirement pension.

State pensions depend largely on the amount and type of national insurance (NI) contributions that a person makes during their working life. To qualify for a full basic state pension, an individual needs to have contributed for nine tenths of their working life. This is usually 39 years for a woman and 44 years for a man. Pensions may be scaled back for people who have contributed less. People who take career breaks (in order to look after children) may qualify for home responsibility protection which reduces the number of years that contributions are required for.

Private pensions

These are pensions which people build up either on their own or with the help of their employer. Tax advantages are available on a large proportion of what is paid in. Typically, for every 75p paid in, the Government will make it up to £1.00 because tax is not currently paid on contributions. The main types of private pension are:

  • Employer’s pensions. Many people are lucky enough to get pensions with their jobs. In some cases, the employer will pay all of the contributions and in others, the employee contributes as well. Benefits are usually based on either the amount of money paid in, or the time spent in the scheme, in relation to how much the individual is paid. In the latter case, the person will typically get a pension worth one sixtieth of their final pay for every year they have been in the scheme (up to a maximum of two thirds of their final pay).
  • Personal pensions. If the employer does not run a pension scheme, the employee can take out a personal pension with an insurance company. Some employers will contribute towards this scheme. On retirement, the funds in money are used to buy an annuity which will provide a pension for life.

Life savings

Many people also rely on the personal savings they have made. Some may even rely on selling their homes or their businesses.

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