Pension basics

What is a pension?

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

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. 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.

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 revalued. These individual pension amounts are then added together to arrive at the total pension payable from the scheme.

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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.