Unfunded pensions

These are large public-sector state-run pension schemes for people employed by the NHS, civil service, teachers and military. They provide you with a guaranteed income at retirement and are often referred to as pay-as-you-go schemes. If you’re a member, your retirement benefits are paid from the contributions you and all the members have paid, as well as from the government using money raised from income tax.

Unfunded pension principles

  • As a member you are required to pay into the scheme and the amount you pay varies depending on your salary. Good news though, as the government gives you tax relief on what you put in.
  • If you’re a member or have been in the past, then you’ll have an account within the scheme.
  • Depending on your state sector you could take your pension and tax-free cash at State Pension age or at any age between 55-75 (some older members can still retire at 50). If you decide to retire early, then your pension is reduced.
  • To help protect the value of your retirement income as prices go up your pension will be increased every year in line with the Consumer Prices Index (a measure of the increase in consumer goods and services).

Why are unfunded pensions different?

Unfunded pensions deliver a guaranteed income and tax-free cash amount when you reach retirement age. You have no concerns about investing your money, wondering how it’s doing or what you might get back later in life. In effect, you are building up a pension with a ‘promise to pay’ that the scheme will provide when you retire.

What are the typical benefits?

The amount of retirement benefits you build up over time varies across the different schemes. It often depends on the year you started work with your employer. The common factor across all the schemes is that in exchange for your membership, each year a credit is given to you in the form of a fraction e.g. 1/80th or 1/60th. The annual statement you receive from your scheme will tell you how much retirement income you have built up. In all cases, a tax-free cash amount is also available to you. Helpfully, your statement shows an estimate of the pension you might receive. And, that’s about as certain as you can get in the pensions world!

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