Pension Advice

What is a pension scheme?

A pension scheme is a variation on a savings plan, it’s one that is specifically designed to help you save money for later life, rather than one to be used in the near future. It also has very favourable tax treatments when compared to other forms of savings.


Is a pension like a long term savings plan?

To put it concisely; yes. As we know, the State Pension, won’t cover us in our retirement years. So it makes sense to put some money away for when you’re older, independently of your state (Government) pension, and that’s what pension schemes help you do. You save a little of your income regularly during your working life, so then you can have a good income and a good quality of life in your later years, when you may want to work less or retire completely.


Are there different types of pensions?

Yes, there are several types of pension schemes. Some may be run by your employer, others you can set up by yourself. And saving into one scheme doesn’t mean you can’t save into another or use other tax-efficient savings plans like ISAs.

When the time comes for you to start enjoying your pension, there will be several options available to you depending on the type of pension you chose. These may include being able to take a tax-free cash sum and the added security of being able to receive a regular income.

We’re going to look at these in more detail for you throughout this guide.


What’s the difference between a pension scheme and the State Pension?

A pension scheme is designed to provide you with income in addition to the State Pension. The single tier State Pension provides up to £168.60 a week, although you may have some additional protected payment as well. If you would want more income than this, saving into a pension scheme makes sense.

Because the State Pension scheme is only ever going to be a minimum amount, it seems sensible, to also have some form of company or private pension plan to top this up.


How do I know the amount of pension I will get?

It depends on a lot of factors such as age when you started, % invested over the years etc.

It also depends on the type of pension you took at, for example if you have a defined benefit pension scheme, you will receive a specified level of income that is worked out according to factors such as your final pensionable salary and years of pensionable service.

If you have a defined contribution pension scheme, you build up your own pot of money. The value of this pot can go up or down but over the years, should increase in value and you shouldn’t be affected by short term losses.

So you should contact us to get full information about the value of your pensions and / or the likely value of your pensions in retirement.


Is it worth setting up a pension?

No matter how old you are, there is always a value in saving into a pension scheme, particularly if your employer is also willing to contribute. Also, it’s a tax-efficient way of saving money over time and you may be able to take some or all you save as a cash lump sum (this sometimes isn’t tax-efficient).


What if I die before I take my pension benefits?

In most cases, your pension scheme will provide benefits on your death. If you’re in a defined benefit pension scheme, there may be an income payable to your spouse and/or dependents. If you’re still an active member of that scheme, then there will probably also be a lump sum payment made to your dependants which is often a multiple of your pensionable salary. You should check with your scheme’s administrator to see what death benefits may be payable, and to ensure you’ve left the correct details of who you want to benefit.

If you’re in a defined contribution scheme, it may be possible that a lump sum will be paid to your dependants. The lump sum is normally the value of your fund. Again, it’s best to check with your scheme’s administrator or pension provider to find out what death benefits may be payable to them.


How does a pension scheme work?

Pension schemes are all different. How yours will work depends on whether it’s a defined benefit or defined contribution scheme and the rules of the scheme. Let’s look at these some more below, to give you a better understanding of their differences.


What is a defined benefit pension scheme?

If you have a defined benefit pension scheme, you’ll get a specified income when you reach the scheme’s retirement age. This income is worked out using a formula that takes into account your salary and length of service. You may have to pay contributions to the scheme but your employer will also pay contributions on your behalf.


What is a defined contribution pension scheme?

If you have a defined contribution scheme, what you get when you retire is not specified in advance. Instead you build up your own pot of money. You (and your employer if it’s a workplace pension scheme) pay into your pot each month and this money is invested. So the final value of your pot will depend on the amount paid in, the charges and the performance of the investments.


What is Automatic enrolment?

Automatic enrolment is a Government initiative that obliges all employers to enrol eligible employees into a workplace pension, provided they are not already in one. Employers also have to pay a minimum contribution into the pension scheme for their eligible workers.

Automatic enrolment started in October 2012 and was phased in over six years.  You are eligible for automatic enrolment if you:

  • Are at least 22 years old;

  • Have not reached State Pension age;

  • Earn more than a minimum amount a year (currently £10,000); and

  • Work, or ordinarily work, in the UK (under a contract).


What tax relief do I get on my pension contributions?

One of the main attractions of saving into a pension is the tax relief you can benefit from. All taxpayers can get 20% tax relief on their contributions, meaning that if you pay in £80, the government will add a further £20. Higher rate taxpayers can receive additional tax relief through self-assessment.

If you’re at all unsure about the tax status of your current pensions, ask us for advice as we’re happy to assist you.


I am over 55 years old – is it worth me being automatically enrolled?

Even if you’re relatively near your ideal retirement age, you can still benefit from staying in a workplace pension, securing an employer contribution and tax relief.  When you reach your date of retirement you can feel reassured that you’ve built up a pension sum and any pension pot you’ve built up can usually be taken either in part or in its entirety as cash.  


Is there a limit on how much I can pay into a pension scheme?

No.  However there is a limit on the amount you can pay in that is eligible for tax relief. We’ll look at this in a little more detail below to give you a bit more guidance.


What exactly is a pension plan?

A pension plan is not necessarily what people think it is, and it most certainly isn't only for old people.

A pension plan is fundamentally a simple product:

  • It is a pot of cash that you, and your employer, can pay into - and which you get tax relief on - as a way of saving up for your retirement.

  • Then at retirement, you can draw money from your pension pot or exchange the cash with an insurance company for a regular income until death, called an annuity.

Since the 2014 Budget you've been able to access your pension plan once you turn 55, taking as much or as little as you like, whenever you like. Be aware this is the access age for your pension plan, which is different to the state pension and which has a different set of access ages applicable to it.


Does saving for my pension really affect my income?

It's important to understand how saving for a pension affects your income. Effectively you're losing disposable income now in exchange for a future pay rise (in the form of pension income). As you'll be getting less in your pay packet, consider this carefully when budgeting.

If you’d like some advice before beginning to increase your pension savings, talk to one of our friendly team.


Is a pension REALLY worth it?

A key advantage of a pension plan is the tax relief, which comes in two forms depending on whether you're a basic-rate or higher-rate taxpayer.

You get some tax back on the money you put into a pension, while gains from the investments you make with that cash are largely tax-free. So a pension is worth it if you consider the tax free element.


How do I get Tax relief on pensions contributions?

You get the tax back you've paid on all contributions, if you're under 75, subject to an annual allowance. (See more below).


What tax relief do I get on pensions?

If you pay the money into your pension yourself, or if it is taken by your employer from your pay packet, you automatically get 20% tax back from the Government as an additional deposit into your pension pot.

If you are a higher-rate taxpayer you can claim an additional 20%, while top-rate taxpayers can claim an additional 25%.

If you are part of a workplace pension, you may not need to reclaim any tax if your employer simply deducts less tax from your pay packet.

However if you don't reclaim, it won't be paid. Therefore it is important to check if you are in a higher tax bracket as the Government will not automatically allocate it without a claim being made.

Also, it’s worth noting that if your employer puts the money straight in from your gross pay then it's never taxed in the first place; another advantage.


How does the tax relief on pensions work?

If you get 20% tax relief, it doesn't mean you get 20% back of what you contribute.

Instead, your tax is worked out your earnings on your contribution amount before tax was deducted. You then get back the difference between your contribution and your pre-tax earnings.

So when a basic 20% rate taxpayer invests £80 of their take-home pay in a pension, they'd have actually earned £100 before tax to come out with £80 (20% of £100 is £20, leaving £80). In that example, the tax relief is £20.


How much should I put in a pension?

With auto-enrolment pensions, there are minimum contribution levels. But if you can you afford it, you really should be contributing more.

Before starting, it's worth noting those in debt, especially at high rates of interest, should consider whether it'd be better to get rid of that debt before starting a pension.

Plus, a pension is only one form of retirement planning. Combining it with other methods is often a good plan, and that’s where talking to our advisers to get some specific, tailored advice would likely be most helpful.

If you opt for a pension, the simple answer of how much to put in is as much as possible, as early as possible.


Is there a way to work out what % I should be saving into my pension?

Take the age you start your pension and halve it. Put this % of your pre-tax salary aside each year until you retire. (Make sure you include your employer's contribution in that percentage).

So someone starting aged 32 should contribute 16% of their salary for the rest of their working life. This may seem like a large sum, but again consider that the State Pension will be highly unlikely to support you in your retirement and you should plan ahead and save as much as possible. Some other key points on the amount you should be saving:

  • Don't delay. The sooner you contribute, the longer your money has to grow. The compounding effect - where the cash your investment earns can, itself, attract additional earnings - makes a massive difference.
  • Increase payments. It's important to put away a constant proportion of your earnings. As your pay increases, make sure your contributions increase proportionately, or you'll fall behind.
  • Use the 'pay rise trick'. Most people will be unable to contribute enough at the beginning. So start with whatever you can, but each time you get a pay rise, put a quarter of it each month into your pension. Then you'll be basking in the glory of more money, without getting used to spending the cash destined for your pension.

How much can I put in a pension?

There's technically no limit as to how much you can put in a pension. But, there are limits on how much tax relief you'll get for doing so, and there are three different limits you need to be aware of:

  • An earnings limit. You get tax relief on contributions up to your annual earnings. Imagine you earned £20,000 each year, but had £30,000 in savings, and decided one day to put all your savings into a pension. In this situation, you would only earn tax relief on the first £20,000 of your contributions.
  •  An annual limit. This limit only applies to higher earners. You can only get tax relief up to your current annual allowance, made up of the current year's allowance (currently £40,000) and any unused allowance from the previous three tax years.
  • Since April 2016, anyone whose total income, pension contributions and employer pension contributions is over £150,000 in a year will get a reduced allowance. For every £2 over £150,000, the allowance tapers down by £1, meaning anyone earning a total income of £210,000 or more will only get £10,000 tax relief annually. Those whose income (excluding pension contributions) is under £110,000 will be unaffected by these changes, even if pension contributions take them over £110,000.
  • A lifetime limit. Again, this is only really relevant to the highest earners. This 'lifetime allowance' has gone up to £1,055,000 for 2019/20. What it means is that if your total pension savings (including gains/interest) are over this amount, you face a tax charge.


What is auto-enrolment?

For many years, your company may have set up and contributed to a workplace pension. But not all companies have historically offered workplace pension schemes, and auto-enrolment was designed to address this by forcing all UK companies to offer a pension scheme.

The auto-enrolment rules mean that if you're an employee, your employer will be forced to offer you a pension scheme. From 2018 all employers by law had to contribute to their employees' pensions. And from 6 April 2019, the minimum contribution level has increased to 3% from employers with a combined minimum total of 8%.

You have the option to say ‘no’ to auto-enrolment if you don't want to join. But it's an opt-out rather than an opt-in scheme, so if you do nothing, you'll be opted in. Consider that unless you’re paying off debts, you’re much better off in a company pension scheme than out of one and plan accordingly.


What is 'salary sacrifice'?

Paying into a pension gets all taxpayers a tax break. But for an extra and easy bonus, something called ‘salary sacrifice’ is worth considering.

Salary sacrifice applies to a number of workplace benefits such as childcare vouchers or cycle-to-work schemes, not just pensions. Basically, it's where you give up some of your monthly earnings while your employer puts it towards something else - in this case, pension contributions.

As it comes out of your gross salary and straight into your pension, you pay a reduced rate of employee’s national insurance (NI). Your employer will also pay a reduced rate of employer's NI which gives them incentive to operate the scheme.

  • Basic-rate taxpayers - Because your pension contribution comes out of your pre-tax salary, you'll pay less income tax at 20%. You'll also avoid your 12% NI contributions on the amount you sacrifice. This means for every £68 you sacrifice from your pay packet, £100 goes into your pension pot.

  • Higher or top-rate taxpayers - If you pay tax at the higher 40% or 45% rates, salary sacrifice means you don't have to claim back the extra tax relief yourself - as you are never taxed on those contributions in the first place - and you don't have the 2% NI deducted on those contributions either. To deposit £100 in your pension pot, you only have to give up £58 from your pay packet, as no tax or NI is deducted as a higher rate payer. For a top-rate payer, you only give up £53.

One thing to take into consideration is that you'll take less money home, albeit to get a greater benefit back in the future. However, having a lower upfront salary may hit you — for example, it could reduce your earnings so that you'd no longer qualify for Statutory Maternity Pay.

In 2019/20, this means that if your salary sacrifice takes your salary below £118 per week, £512 per month or £6,136 per year, you'll be affected. If that's you — think twice before sacrificing and consult one of our specialist advisers if needs be.


Should I take my employer's pension contribution offer?

If you're employed, your employer may top up your pension as part of your benefits package, so absolutely consider it.

This is effectively a pay rise, so don't give that away, plus there's no tax to pay on that contribution (subject to annual allowances, above). It may not be going into your pay packet, but it is cash going towards your future.

Of course, you may not have the cash to afford the compulsory contributions, and there's no point getting into costly debt if that's the case.

You also need to check if you have so-called primary, enhanced or fixed protection. This is where you will have fixed your lifetime pension allowance (£1,055,000 in 2019/20 for anyone without protection). If you have protection you will lose it if you take your employer's pension so weigh up the benefits and ask us for advice if this point doesn’t make immediate sense to you – don’t try to work something out on your own when we’ve experts who can help!


Are pensions really worth it?

Of course! Tax free, employer contributions, reduced NI contributions and no capital gains tax – what could possibly be putting you off?!

Pension saving is a tax-efficient option that isn't implicitly risky. The risk comes from the investment choice. Safer investments, such as putting your money in cash rather than exposing it to the risks of the stock market, are available and you can discuss these fully with us – we won’t recommend a riskier investment if it’s not something you’re fully comfortable with.


What are the different types of pension?

Pensions come in all shapes and sizes. The first distinction is whether the pension is a final salary or a money purchase pension, these terms can also be referred to as defined contribution or defined benefit.


What is a final salary pension?

These pensions, sometimes referred to as defined benefit schemes or Career Average Revalued Earnings (CARE) schemes, are largely funded by employers, though staff may also have to pay into them. With these, you get a percentage of your final salary before retirement, or when leaving that firm, as an annual income.

What that percentage is depends on how long you worked for that particular firm. There is normally an 'accrual rate' set by your employer as a fraction of your final salary which you accrue year upon year of working there.

Say the rate is 1/60th (remember this is an illustration and you need to check with your employer what figures they actually use), you get 1/60th of your final salary as a retirement income for each year you worked for that firm. So if you worked for 30 years, you'd get 30/60ths, or half your final salary with that firm.


What is a money purchase pension?

Money purchase pensions, also known as defined contribution schemes, save into your pension pot under a 'money purchase arrangement'. After years of saving, this cash can then be withdrawn thanks to new pension freedoms or can often be swapped for an annuity - an income for life.

Most pension plans are money purchase. How they differ is the way the money is invested and/or the level of charges.


What is a workplace pension scheme?

Workplace pension schemes. This is where you and/or your employer make regular monthly payments, with that money invested by a pension company until you hit retirement. There are two types of workplace pensions: trust-based and contract-based pensions.


What is a trust-based pension scheme?

Trust-based pensions - A board of trustees manage investments on your behalf. You and possibly your employer pay into the pot, and it's invested. The trust fund is kept at an arms length principle, separate from the company. What's more it allows benefits to be handed to your partner or other dependant members.


What is a group personal pension?

Group personal pensions - This type of pension is between you and a third party insurance provider. The provider isn't required to act in your best interests. The snag is that your employer chooses the provider, but these arrangements usually offer you a choice of investments.


What is a stakeholder pension?

Stakeholder pensions. These are similar to workplace pensions, but have low and flexible minimum contributions, capped charges and a default investment choice. You won't have to decide where to put your cash.


What is a self-invested personal pension?

Self-invested personal pensions (SIPP). These work in the same way but are DIY pensions, allowing you to choose your investment. Investors prepared to do the legwork themselves can potentially reduce costs, if they use the right provider. Read a full guide to SIPP.


What is a state pension?

Don't forget the state pension. This is where you get a small pension from the Government when you hit state retirement age. The basic state pension has gone up £3.25 a week to £129.20 for 2019/20. Or under the new state pension - for people who reach retirement age on or after April 2016 - it's gone up £4.25 a week to £168.60 for 2019/20. You build up entitlement to the state pension by paying national insurance (NI) throughout your working life.  It is also worth noting that 35 years of qualifying contributions are needed for full state pension as well as there being different classes of NI contributions that qualify. If you’d like advice as to your likely entitlement we can assist you with that information as part of our service to you.


Who's holding my money in a pension?

Your pension money goes into investments, and this is how it makes its profit. Where that money is invested is down to you. If your employer chooses which company manages your investments, you can decide the type of risks you want to take with them.  The money is administered by a pension provider, the money is then part of a pooled investment, which is managed by an investment house into a selection of funds which uses stock trading to produce potential returns.

The Government has set up its own scheme, called the National Employment Savings Trust (Nest), which employers can join.

In a workplace pension (not a final salary scheme), where the money is managed by a third party, the fund manager may choose the particular investments, but you can let it know the type of risk you want.

If you start your own pension, you choose the manager. If you opt for a SIPP, it will also be managed by another firm .

While the National Employment Savings Trust (Nest) arrangement by the government is a great scheme to encourage employers to provide employees (some of whom may not started a pension) with contributions, it isn't necessarily the only option.

For some, sticking to pension contributions could reduce take-home salary, which could affect existing repayment arrangements and squeeze finances – so it’s worth carefully considering and planning before you do anything.


What is NEST?

Nest has been around since 2013, and has now clocked up more than 2 million members. It’s a Government scheme and most of the companies who now provide workplace pensions under the new auto-enrolment use NEST. But if it's not for you, there are alternatives such as the not-for-profit People's Pension, the for-profit NOW which collaborates with one of the largest pensions funds in Europe, or Smart Pension. When you agree to auto-enrol on your company pension, you will be given a choice of which you prefer to manage your pension.


How do I get a pension?

Under the new rules, many people will end up in a company pension so all they need to do is go ahead with what their employer offers. To pocket any contributions your employer makes, you need to agree to be part of its scheme.

If you opt for your own pension (where only you contribute) then you will need to scour the market for the best deals, this is where we can help.


How do I get a cheap pension?

If you don’t get a workplace pension or auto-enrolment, you can definitely look around at your options and see what’s going to provide you with the best income later in life.

Because this can be a complex minefield of information to wade through, we’ll help to clarify it all for you and advise you on the best route for you.


What happens to my pension pot when I retire?

Once the money is in a pension, it can't be withdrawn until you reach the access age. It must stay there until you're at least 55 (sometimes prior to this if retiring on the grounds of ill health) – remember, this is for private pensions not the State Pension. At that point, you can take 25% of it as a tax-free lump sum, with the rest ideally providing an income for the rest of your life.

If you get approached before you're 55, it's a scam known as pension liberation. These scams are so damaging the government banned cold calling about pensions in January 2019.  Firms ignoring this could be fined £500,000; so if you do get a call like this make sure you let the ICO (information commissioner’s office) know.


When can I take my pension?

When your regular income stops... its decision time. Ideally, start preparing a few years beforehand so you have a plan for phased retirement and know how much money you’ll have to live on.

Provided you're over 55, you'll be able to take as much as you like, when you like - though drawdowns above the tax-free 25% will be taxed at your marginal rate - so 20% if you're a basic-rate taxpayer, 40% or 45% if you're a higher or additional-rate payer, or the amount you've taken from your pension pushes you into that rate.


What am I allowed to do with my pension money?

You can do anything you like with your cash (you don't have to buy an annuity any more).

You can still use your retirement cash to buy an annuity if you want to, but you no longer have to. The pension freedoms that were introduced in April 2015 mean that anyone who's aged 55 or over can take their pension money however they want, whenever they want, from the age of 55 - there's now complete freedom.

For most people, accessing pension cash at 55 will be too early, so it can just be left where it is. Yet, if you want to, you can also access all your pension cash at once - the first 25% is tax-free and the remaining 75% will be taxed as income.


Can I choose how to invest my pension money?

Assuming you've not taken your entire pension out, the remaining options are:

Option 1: Leave it invested in your pension for when you need it. Do this and it’s important to understand when you withdraw cash you get 25% of each lump sum you withdraw tax free. Eg, if you had £100,000 and took £20,000 out you’d get £5,000 of it tax-free, the rest would be taxed at your current rate.

Option 2: Take 25% tax free, then buy a flexible income drawdown product. This is a product you buy that keeps the rest invested so it can still hopefully grow, but you can also use it to take income when needed. The tax here is different, you get the first 25% you withdraw tax free and then the rest is taxed when you take it – which could be useful if you’re likely to be in a lower-tax bracket once you’re older.

Option 3: Take 25% tax free, then buy an annuity. This gives you a guaranteed income each year for the rest of your life.


How safe is my pension?

With savings accounts, the simple rule is that up to £85,000 per person per institution is fully protected should your bank go bust. This protection is provided by the UK's Financial Services Compensation Scheme (FSCS, see the Savings Safety guide).

This £85,000 limit has been extended to pensions and investments from 1 April 2019. Previously the FSCS limit was just £50,000, except for annuities – where cover was and remains unlimited.  

FSCS protection for pensions can seem very complex. This is just a general guide, always check with your provider.

Some basic rules to remember:-

  • Once you’ve earned the pension benefits, your employer can’t take them away. Worst case scenario is that your employer could stop contributing to an old-style pension plan, also known as a defined benefit plan, in which case your pension benefit will no longer increase.

You also have the protection of the Pension Protection Fund (PPF) who are there to protect people with defined benefit pensions, should their employer become insolvent.


What does the FSCS pension guarantee cover?

The FSCS does not generally cover performance losses, say if the shares you invest in go bust: that's the investment risk you take. However, it can cover poor investment management. Its safety net also applies if you lose money due to the pension or investment firm going bust.

Usually with pensions, if you buy through a broker, it doesn't hold any of the cash, it simply acts as a conduit for you to put the money into whatever funds or investments you want and the cash sits with fund managers or banks.  The £85,000 protection applies should any of these become insolvent.

If protection kicks in, the FSCS will first try to transfer your funds from the failed company to another company.

For failed IFAs or brokers that mis-sold or provided dodgy pension advice, there may be a claim against the firm for mis-selling via the FSCS. This would be up to the investment limit of £85,000 - under current legislation.  

If you've got a defined benefit (final salary) pension, there's a risk of your employer going bust, leaving you with no pension income. However, the Government set up the Pension Protection Fund (PPF) which may pay compensation, subject to limits.


Does the FSCS guarantee cover cash?

If you have a Sipp and decide to hold the money as cash, you are normally covered under the standard £85,000 cover per person per institution, the same as ordinary cash savings.

Ask your Individual Sipp provider which bank the cash is held in (often they spread it around up to five). Then check whether any other savings you may have are in institutions linked to those used for the Sipp cash, as cumulatively you'll only get up to £85,000 protection in each. See What Counts As A Financial Institution?

FSCS protection for pensions is very complex, and can vary with each product's structure. This is just a general guide, always check with your provider.


Can I also save into a Lifetime ISA?

In the 2016 Budget the Chancellor announced the creation of a Lifetime ISA, which started in April 2017. If you’ll be under 40 then, you’ll be able to use it to save for your first home or your later years, and the state will add 25% on top – that’s £1 for every £4 saved - up to a limit of £4,000 per annum until you’re 50. This contributes to your personal ISA allowance in each subsequent year.

The Lifetime ISA is designed as a boost to retirement savings, not a replacement. You can access the money in your Lifetime ISA tax-free from age 60.


How does an ISA compare to saving into a pension?

Ideally, you'll be able to save into both to maximise your retirement savings.

But, pensions and ISA savings are different. Both have their advantages, but if you're making a choice there are some things you need to consider.

If you're employed, it's generally an obvious decision to save into your workplace pension. With auto-enrolment, your employer must contribute towards your pension, plus you get tax relief of at least 20% (tax relief means that for every £4 you put into your pension, you get tax relief of £1 - the same boost as with the Lifetime ISA). Both of these together are worth more than the Lifetime ISA bonus. This is especially true if you're a higher-rate taxpayer, as the tax relief provided will be then at 40%.

But, if you're self-employed, or you want retirement savings you can access more flexibly than a pension (albeit with a penalty), then the Lifetime ISA's definitely a good alternative.

There are other advantages to pensions, though. If you lose your job, and need to then claim benefits, pension pots aren't counted as part of your wealth. ISA savings may be taken into account. Similarly, Lifetime ISAs could be forfeit to creditors in bankruptcy, whereas pensions are protected.


Start planning your future. Speak to us today.

Contact Us

Seventy Financial Planning
The Apple Store, Haggs Farm,
Haggs Road, Follifoot, Harrogate,

01423 611004

[email protected]

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