Can I Transfer Out of a Final Salary Pension Scheme?
Question asked by Jonathan Purley
I understand that any pensions I accumulate will provide me with an monthly income once I’ve retired, but I don’t understand how the funds within the pension accumulate over time. How do personal pensions work?
When you start a pension, you make monthly contributions into the scheme. If you’ve joined your employer’s workplace pension, they will usually contribute to the plan on your behalf too.
These contributions also benefit from tax relief. If you’re a basic rate taxpayer, you’ll get 20p in tax relief for every £1 you make in pension contributions. If you’re a higher rate taxpayer you’ll get 40p in tax relief for every £1 you pay in and 45p in the £1 if you pay tax at the 45% additional rate.
Contributions are then invested in the financial markets, such as the stock market, by your pension provider. The aim is that they will grow over time, leaving you with a big lump sum which can be used to provide you with an income once you retire.
Of course, the value of pensions, investments and the income they produce can fall as well as rise, meaning you could get back less than you invested.
The earlier you start saving into a pension the better as, thanks to the power of compounded returns, you’ll have more potential for it to grow, and grow by larger sums, than if you’d started investing later.