What is a Pension?

A pension is a long-term arrangement designed to provide people with a regular income when they are no longer earning from employment. Pensions are investments with special tax rules - for example, contributions to a pension scheme are given tax relief.

In the UK, pension schemes fall into a number of major divisions:

• Basic State Pension
• Additional State Pension (also known as the State Second Pension)
• Personal Pensions
• Stakeholder Pensions
• Occupational (Company) Pensions
• Self Invested Personal Pensions (SIPPs)
• Group Personal Pensions (GPPs)

The majority of pension schemes work in the same way; whilst you are working, you pay a small amount into your pension fund - or, in the case of the State Pension, you pay National Insurance directly from your wages to the Government. When you stop work, or reach State Pension age, you then receive regular payments based on the amount you have contributed.

In Australia, pension schemes are known as superannuation plans, whilst in North America, they are more commonly known as retirement plans.

The State provides basic pension provision intended to prevent poverty in old age. The basic state pension, formerly known as the 'Old Age Pension' was introduced in the UK in January 1909, following the passage of the Old Age Pensions Act 1908. A pension of 5 shillings per week (25p, equivalent to £19 in modern day terms) was payable to a person with an income below £21 per year (equivalent to £1,600 today), or a pension of 7s 6d per week (equivalent to £28 today) for a married couple. At that time, the qualifying age was 70, and the pensions were subject to a means test.

Now, women over the age of 60 and men over the age of 65 are entitled to claim state pension, although from 2010 the state pension age for women will rise, eventually reaching the age of 65 by 2020.