Pensions
Core concepts
Understand the two main structures: defined benefit (DB) (promised income based on salary/service) and defined contribution (DC) (pot built from contributions and investment returns). Know state pension basics, auto-enrolment, tax relief on contributions, annual allowance and lifetime allowance concepts, and the pension commencement lump sum (often 25% tax-free). Learn the retirement options: annuity purchase, income drawdown, and UFPLS. Trustees, scheme rules, and transfer rights matter.
Traps
Questions mix up tax relief (on the way in) with taxation of income (on the way out). Watch for the annual allowance taper for high earners, the money purchase annual allowance after accessing a pot flexibly, and the difference between DB transfer (needs advice above a value threshold) and DC transfer. Another trap: nomination versus expression of wish for death benefits.
Rule of thumb
DC pension value = contributions + investment growth − charges. Over long periods, charges compound heavily; a 1% annual charge can meaningfully reduce the final pot.
Worked example
£500 monthly contributions for 20 years at 5% growth: use FV of annuity ≈ £500 × [((1.05^20 − 1)/0.05)] ≈ £500 × 33.07 ≈ £16,500 - but this is monthly, so multiply appropriately (approximately £205,000). Always check whether the question uses annual or monthly compounding.