Pension basics

What is a pension?

A pension is a source of regular income to live on when you retire.

What are the different types of pension schemes?

Qualifying workplace pension

As a result of automatic-enrolment legislation, all employers will eventually have to offer their employees access to a workplace pension scheme that meets certain minimum standards. The LGPS meets these minimum standards and is, therefore, a qualifying workplace pension scheme.

National Employment Savings Trust (NEST)

NEST is the Government's workplace pension scheme set up for automatic-enrolment. Where an employer does not provide access to a workplace pension of its own they can use NEST to meet their workplace pension duties, no matter how large or small their organisation. They can use NEST on its own or alongside a scheme they already have in place.

Personal pensions

Personal pensions are provided by insurance companies and banks and are popular with the self-employed who do not have access to a workplace pension. Some employers offer personal pension plans to their employees and pay contributions into it. Personal pensions offer investors a choice of investment funds to choose from. These investments are used to buy a pension at retirement.

Stakeholder pensions

Stakeholder pensions are essentially low cost personal pension plans.

Given the changes to workplace pension schemes under automatic-enrolment the future of employer sponsored stakeholder schemes are uncertain, as many will require amendment in order to meet the employer workplace pension duties.

Company (occupational) pensions

An occupational or company pension is another term for a workplace pension scheme. It is usually used to describe schemes run by private sector employers.

What is a tax free lump sum?

Pension schemes, whether they are work based or personal pensions, allow members to take part of their benefits as tax free lump sum when they retire. The LGPS can pay a tax free cash sum on retirement. Dependant on your period of membership in the scheme will determine whether this is paid automatically or if it is paid through giving up some of your pension.

What is an annuity?

An annuity converts your money purchase pension into an income for the rest of your life.

Annuities are sold by life insurance companies and you can add different options and get different types depending on your needs and circumstances. LGPS pays pensions straight from the Scheme and so you will not be required to buy an annuity if you join the Scheme.

How do Career Average Revalued Earnings (or CARE) schemes work?

In a CARE scheme the pensionable pay for each year of membership is used, in order to calculate a pension amount for that particular year. That pension amount is then increased (revalued) each year in line with inflation. These individual pension amounts are then added together to arrive at the total pension payable from the scheme.

For more information visit the section How a CARE scheme works

How do defined contribution/money purchase schemes work?

You build up a pension fund using your contributions and your employer's contributions (if they make any) plus investment returns (if any) and tax relief.

When you retire you can take a tax free lump sum from your fund and use the rest to secure an income - usually in the form of an annuity.

Unlike LGPS there are no guarantees on how much you will receive. Most private sector employers offer their employees a defined contribution arrangement.

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