It's all you ever seem to read about these days isn't it? Ever increasing layers of complication are added each passing year, by Governments that tell us they have been making pensions "simpler" as far back as 2006?

The reality is, pensions should be simple to understand, and for any of you that have been bamboozled by the events of the previous nine years, I have attached a basic summary of what they are all about in the UK:

1. A savings plan to enable you to make extra provision (to the State Pension) for your retirement.
2. The word "savings" has quite a wide meaning. In addition to being able to put your money into Bank and Building Society accounts, it is also possible to invest in stocks and shares and property within a pension.
3. You can pay money into a pension on a regular (monthly, quarterly, annual) basis as well as on an ad-hoc basis.
4. It is possible to obtain income tax relief on your payments into your pension and the amount of relief is generally restricted to a percentage of how much money you earn each year.
5. Generally speaking, no tax is deducted from your money whilst it remains within your pension. The exception to this is that some dividend payments are taxed before they are received into your pension.
6. There is normally a minimum age that you can start to withdraw money from your pension. In the UK, this is age 55 but the UK Government have plans to increase this over time so that it is always 10 years behind state retirement age.
7. When you do decide to start withdrawing your money, it is normally possible for your money to be withdrawn as a lump sum, a regular (monthly/quarterly/annual/ad-hoc) payment, or a combination of both. Some of the withdrawn money will be tax free and the remainder will be taxed as earned income in much the same way your wages are/were.
8. There are now many ways in which you can structure your savings once you have decided you want to start using them as follows:
   
   • You can withdraw your savings entirely and invest the money outside of the confines of a pension. You can then spend the money as and when you need it.
   
   • Leave your money invested inside your pension and withdraw money as and when you need it.
   
   • Buy an annuity. This involves handing over all of your savings to an insurance company who will guarantee to pay you (and possibility your dependents) an income for the rest of your life/their lives. You will never have the right or the option to withdraw any of the money that you gave to the insurance company, in the future. The - only future rights you and your dependents will have is to the guaranteed income payments.
   
   • There are flexible options that now exist, whereby a combination of all of the above are possible.
   
   
9. Each option has taxation consequences and investment risks attached and should not be entered into without seeking specialist financial advice first.
10. There are options to make sure some or all of your savings are passed on to your loved ones, in the event of your death.
11. It is possible that your savings may be subject to tax in the event of your death although the UK Government have recently reduced the number of circumstances when this can happen.

This is intended to be very general and for the consumption of people who are not financial professionals.

By Darren Mills, Abacus Wealth Management