Originally Posted by
MyNameIsTerry
There are different types of pensions, phil. The one we all get (as long as we meet the minimum criteria) is the state pension which you mention. That is taken from your NI over a number of years up to a maximum level and then the contributions stop. Then when you hit state retirement age you can claim it back. They just pay you the set amount the government of the time has agreed hence it can change over the years.
Beyond that you have private pensions and company pensions. There are different types but most people are in standard types and not the salary ones.
With your company pension you put in x and your company matches it plus the government had the 20% tax into your pot. The government tax your pension when you claim it back. You can add larger sums through the year with some schemes up to a value the company has set with their pension provider with some.
With a private pension it works exactly the same accept it is between you and the pension provider/broker. You don't get the matching the company do but you get the 20% tax added to the pot to top it up. The most common is called a stakeholder pension. Because you control this you can change things more easily and deposit bulk amounts more easily to top it up.
When you reach retirement you stop contributing. Some choose to work beyond retirement and continue to pay in so their pension goes further, and is returned at a higher rate, once they do retire which is because they are reduced the number of years the pay out is to be spread.
So, when you retire you traditionally buy what us called an annuity. Think of it like a savings account. It pays you out a sum until it runs out. This tops up your government pension which is why they advise to not rely solely on that if you want to have something similar to what you are used to in your salary. These days you can also take a bulk amount out up to a certain % too but this reduces the pot your annuity makes up so your payouts are less. Tax also applies on annuity payouts.
AS to your question about how people live on much less at retirement it's because they tend not to have mortgages, kids, cars, holidays, buy lots of stuff, etc.
Yes, you can work and claim but it could affect how much tax you pay. Remember that your pension may be under the minimum threshold for tax or in a lower band so your salary may push you over. Obviously that means you only pay tax on what exceeds the threshold though. It could affect any pension top ups the government give you though e.g. pension credit.