A Charity offering personal help and advice for all serving and former members of the Royal Navy, Royal Marines, their Reserves and Families

Pensions - the basic facts

Published 09/01/2019 11:13:00, by Marina Maher

There is an increasing degree of public conversation about pensions nowadays but do you know what pension provision you and your family have.  It is vital that everybody understands the basics about their pension to enable them to make proper, timely decisions about this stream of funding that can enhance or limit later lives.  Let’s have a look at the very basics. 

There are three main types of pension:

  • the State Pension
  • defined benefit pensions, and
  • defined contribution pensions.

State Pension – what is it?
Most people get some State Pension. It’s paid by the government and is a secure income for life which increases by at least the rate of inflation each year.  An individual builds up  entitlement to the State Pension by making National Insurance contributions during their working life.  To gain a full entitlement you must have made contributions for at least 35 years before applying for your pension.  In some cases, you can do this even when you’re not working, such as when you’re bringing up children or claiming certain benefits.  From April 2016 a new flat-rate State Pension was introduced. For the current tax year 2018-19 the full new State Pension is £164.35 per week.

However, you might be entitled to more than this if you have built up entitlement to ‘additional state pension’ under the old pre-April 2016 system – or less than this if you were ‘contracted out’ of the additional state pension.

Defined benefit pension – how do I get one of those?
You’re most likely to have a defined benefit (DB) pension if you work in the public sector or for a large company.  This is a salary-related pension which pays out a secure income for life and increases each year.  The pension you get is based on how long you’ve been a part of the scheme and how much you earn.

You might have a final salary scheme where your pension is based on your pay when you retire or leave the scheme, or alternatively a career-average scheme where your pension is based on the average of your pay while you were a member of the scheme.  The AFPS 75 and 05 are based on the former and AFPS15 on the latter.

Defined contribution pension – what’s the difference?
With this type of scheme, you build up a pension pot which you can draw a retirement income from.  The amount that builds up depends on:

  • the level of charges you pay
  • how well your investment performs, and
  • how much you and your employer (if you are employed) pay into the scheme

Defined contribution (DC) pensions include workplace, personal and stakeholder pension schemes.

Almost all pensions involve some decision making – what are yours?

Your State Pension choices
Once you’re four months away from State Pension age, (65 to 68) you can either claim your State Pension or defer taking it.

Do nothing if you want to defer. Your pension will automatically be deferred until you claim it and will increase by 1% for every nine weeks you defer. This works out as just under 5.8% for every full year.  The extra amount is paid with your regular State Pension payment when you finally take it.

However please remember that you must apply for a state pension – it does not automatically happen when you reach the appropriate age!

Your pension choices if you have a defined benefit pension
Most defined benefit pension schemes have a normal retirement age of 65.  If your scheme allows, you might be able to take your pension earlier but this will reduce the pension you get quite considerably.  When you take your pension you usually have the option of taking some of it as a tax-free cash sum.  How much you can take will vary depending on your scheme rules, but often you can take roughly up to a quarter of the value of your pension benefits like this.  However this does reduce the amount of regular income you can expect from the pension, so consider carefully 

What are your options if you have a defined contribution pension?
Once you reach 55 you have complete freedom over what to do with your pension investment (pot), however, the longer you leave your pot to continue building up, the more money you will have to live on in retirement.  You can buy an annuity (a pension paying investment scheme), draw down on the investment sum as you need it, or a combination of both - to understand the choices for using your pension pot, bodies such as the Money Advice Service, and ourselves suggest using Pension Wise – the free and impartial service backed by government.  If you are still unsure of the best option for you, consider taking regulated financial advice.

Whatever your pension situation it is vitally important to have at least an idea of what provision you have made fro retirement.  Most pension providers can give you an approximation of pension value, in today’s terms, against timelines so take advantage of this to work out how much you might get when you plan to retire – is it enough for what you hope to do when you stop working?  If the answer is yes then “no worries” but if it is not try and do something about it!  Please remember with the Government Actuary Department projecting average life expectancy in the UK to be around 80 for men and 83 for women many people can expect a significant period of retirement – its best to plan and make provision early and enjoy the experience rather than just exist!


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