UK Pension basics

So i have read and understand the pension explanation on the uk.gov site. Great.

One big thing it did not mention and my question is.... where does the money go that the employee, the company and the gov (tax savings) contribute? Is it like the US 401k were you get investment options ie the stock market?

Thanks in advance for everyones time.

In the UK a "pension" refers to a container or "scheme" that allows you to invest PRE tax money for use later in life after retirement...

There are many different types of pensions depending on your job etc and the offerings they have. The most common ones these days are known as defined contribution pensions and that basically means you will get out what you put in.

Due to recent law changes almost all employers offer or will soon have to offer some kind of pension scheme to their employees...

In the UK now you can add 40k pre tax to your pension per tax year and get full tax relief on it. Once the money goes into the pension "container" you cannot get it back out again until you retire. I have a Self Invested Personal Pension SIPP and my money is stuck in there until the age of 55. I'm not 100% sure if company pensions have the same age limit...

Once the money is in there it is very similar to a 401k in the USA which I have also had in the past. The UK is better as you can add more money each year. You can buy mutual funds and other types of investments just like a 401k...All gains are tax free until the point of withdrawal...

If you are a US Tax payer you will need to make sure you don't fall foul of the FACTA laws etc. You may need to declare your pension to the US government when you file your taxes along with your other accounts.

Hope this helps.

yankybrit-

That was a huge help. Thanks so much.

NWKH

The above was great...got the pension thing covered. But that leads to the next question. The US has Social Security. Is there something similar in the UK that everyone is required to pay into?

Thanks.

NWKH

National Insurance.

It's not worth counting on though.  VERY minimal and you need to pay in for 35 years to get it or something crazy!

National Insurance.

It's not worth counting on though.  VERY minimal and you need to pay in for 35 years to get it or something crazy!

35 years of contributions gets one about £155/week in today's money (it is index linked) and it is a straight line calculation so 20 years gets one 20/35ths of £155/week (£88.50).

35 years of contributions gets one about £155/week in today's money (it is index linked) and it is a straight line calculation so 20 years gets one 20/35ths of £155/week (£88.50).

I think that's rough!  Shame it's not contribution based.  Oh well.  I'm not planning on it still being around by the time I retire (same with SS).

WOW.. OK. good to know.

Thanks,

NWKH

I think that's rough!  Shame it's not contribution based.  Oh well.  I'm not planning on it still being around by the time I retire (same with SS).

Although SS is contributions based it is heavily biased to low incomes.  When I was planning on retiring early I went onto the SS website, logging on as myself and doing projections going forward to see how much extra I would get for more ears working.  It was extremely little additional income and I retired at age 55 with 23 years of SS contributions.  SS does not have a mechanism of paying in if you are not working.

A nice advantage to myself on the UK OAP is that just under half of my 29 years contributions will be voluntary contributions which is a fraction of the cost of the percentage that would have been taken out of my salary had I been working those years.