State Pension is a regular government payment funded by National Insurance Contributions (NI) at a fixed rate. The rate is calculated on the basis of the number of years that a British citizen has been paying national social security contributions from their wages or government contributions while they have been unemployed and receiving government benefits. The latter, for example, include benefits for children under 12, unemployment benefits, nursing benefits. If a British citizen does not have enough work experience, the state pension is calculated in proportion to the number of years worked.
If UK citizens reach retirement age after April 6, 2016, the new pension rules apply to them. Such retirees can apply for government payments if they have 35 years of qualifying service, have paid social insurance contributions for at least 10 years, and if their date of birth is:
- April 6, 1951 or later - for men,
- April 6, 1953 or later - for women.
The maximum payout under the new rules is £179.6 per week (as of tax year 2021/2022). The amount of payments is indexed every year either by the consumer price index (CPI), or in general by 2.5%, depending on which percentage is higher.
Any state pension is subject to income tax, as it is paid out-of-pocket. The tax amount depends on total income (including other pensions, investments and interest on savings).
The second type of pension available in the UK is the workplace pension. Every employer must include their employees in the pension scheme and contribute accordingly. This process is called "automatic enrollment". If the employer does not register for the plan or does not make contributions, the regulator penalizes them.
Employer is required to include employee in the pension scheme if the employee:
- works in the UK;
- over 22 years old but has not reached the state retirement age;
- earns from 10 thousand pounds a year;
- has not yet been included in the pension scheme.
Employer is not required to include in the employment pension scheme those earning less than £520 a month, £120 a week or £480 four weeks. It is also possible not to register an employee if one of the following criteria applies to them:
- an employee is about to quit and has notified the employer of the resignation;
- an employee has a certificate of receipt of a lifetime benefit (for example, an HMRC certificate);
- an employee works somewhere else, and his second employer pays labor pension contributions;
- an employee is a citizen of an EU country and is claiming a pension under the EU pension scheme.
A UK citizen can open an individual pension plan with a non-public pension provider if desired. This is especially good for those who are self-employed or freelance and do not have the opportunity to become a member of the pension scheme at work. Before contacting a provider, the applicant must ensure that it is registered with the Financial Conduct Authority (FCA).
Private pensions are similar to ordinary labor pensions, only the applicant pays contributions on his own, from his own savings. Same as in case with labor pensions, he can count on tax benefits, when the government partially refunds the income tax paid earlier.
According to government data as of 2021/2022, a UK citizen can contribute up to 100% of their earnings annually but no more than £40,000 as a pension contribution. When applying for pension, the provider selects a base tax deduction rate of 25% by default.
The accumulated amount can be cashed out before the age of 55, if desired, but in this case, a UK resident will have to pay a huge tax, up to 55%. Only certain categories of citizens can access their savings ahead of time: those who end their careers earlier than usual (professional athletes), or people suffering from chronic diseases.
Photos are from open sources.