Are pensions too complicated?

senior couple watching the sunset

Baffled by financial jargon and confused by investment terminology? Many people think that pensions are too complicated and they put off thinking about their future. Hopefully, we can help to make things easier to understand…

Nobody likes making decisions without having a good understanding of the subject. That’s particularly true when considering potentially life-changing financial options.

Money matters can be complex, but they affect almost every aspect of our daily lives. We have to deal with them.

Pensions are all about your future, and getting to grips with how it will help you in retirement should be done as early as possible. This will ensure you enjoy the best possible returns and can do the things you always wanted.

Pensions schemes

Aside from the state pension that most of us will receive, there are two main types of private pension schemes. These are where you have chosen to save towards your future while you are working and have cash available to put aside. Although investing in shorter-term products can be attractive, saving into a pension scheme is something that will provide income when we are older.

Defined contribution

First, a defined contribution is a pension pot based on how much you have paid in during the time you have been saving. These can be workplace pensions arranged in conjunction with your employer, or a private pension that you have arranged. The ultimate value of the pension fund will depend upon how well the monies have been invested by the pension provider.

Defined benefit

Second, the defined benefit pension, sometimes known as a final salary pension. This is usually a workplace pension that is based on your annual salary and also how long you have been employed. When you join the scheme you will be told what you can expect to receive when you retire. These days, fewer organisations are offering this type of pension.

Ultimately, whichever scheme you have paid into, you will emerge at retirement age with further options…

Annuities and drawdown

Now the bit we’re all looking forward to – how you get your hard-earned money. Of course when you reach retirement age, and you are eligible to start receiving a pension, you are entitled to take up to 25% of the pension pot value as a tax free sum.

So let’s break down how you can receive your pension income into two categories.


These are insurance products that you can purchase with some or all of your pension pot when you retire. There are different types of annuities that are designed to suit different people with differing circumstances. You should always take independent financial advice before proceeding. Annuities will guarantee a set income for the rest of your life. It gives you peace of mind and security that each month you will receive the same amount.

In the case of a Single Life Annuity  you need to be aware that when you die whatever investment remains, there is usually no return of capital to the beneficiaries of your estate, such as your surviving family members. An alternative option is a Joint Life Annuity which will provide for your spouse or financial dependent. A further option is adding a guarantee for a specific period of 5 or 10 years, and that may be a cheaper alternative.


This is income that you take (or draw) direct from your pension pot when you retire. You can still take up to 25% of the fund’s value as a tax-free lump sum, or in smaller amounts, but any further cash that is drawn down will be liable to standard tax rates that apply to you. The remaining funds are invested and can increase over time. This would enable you to draw higher amounts in the future.

If you have other income, you can also choose to lower the amounts you draw down. This would leave your fund to grow.

However, as with all investments, the value of your fund can go up or down. Unlike annuities, when you die the remaining monies are inheritable and can be passed down to future generations.

Hopefully, that puts things into relatively easy-to-understand English.

The Logic Wealth Planning team is here to help if you need further information and advice about pensions and retirement planning.

Start the conversation with a quick call now: 0808 1234 321