Everything you need to know about pensions for your retirement.

Personal pensions are pensions that you arrange yourself. Pensions themselves are also sometimes known as defined contribution or ‘money purchase’ schemes. You’ll usually get a pension that’s based on how much was paid in, and you can check your state pension age and eligibility using the Government website. Your annual NI contributions affect how much of the state pension you’ll receive.

There are different types of pensions. All employers must now offer personal pensions to all their staff in the form of workplace pensions via auto-enrolment. 

If you’re self-employed, you can still save via a personal pension. The money you pay into a personal pension is put into investments by the pension provider. 

The retirement income you’ll get from a personal pension usually depends on:

  • how much has been paid in

  • The return from the underlying investment funds - they can go up or down

  • how you decide to take your money

Ask a financial adviser for help planning your retirement saving initially, and remember you can freely access useful tools such as pension calculators to help you. 

How do pensions actually work?.

There are different types of personal pension. They include:

  • stakeholder pensions - these must meet specific government requirements and are heavily legislated and regulated, and for example they include limits on charges

  • self-invested personal pensions (SIPPs) - these allow you to personally control the specific investments that make up your pension fund, rather than trust to a pension fund manager

You should check that your provider is registered with the Financial Conduct Authority (FCA), or the Pensions Regulator if it’s a stakeholder pension.

Paying into a personal pension.

You can either make regular monthly payments directly from your bank or building society, or you can pay in ad-hoc individual lump sum payments, straight to your pension provider. Your chosen pension provider will send you annual statements, telling you how much your fund is worth. You are limited to annual contribution limits, and you must make sure you do not overpay into your pension or else you could be subject to severe HMRC fines and penalties. 

You will usually get tax relief on money you pay into a pension, unless you’ve gone over your annual amounts. Check with your provider that your pension scheme is registered with HM Revenue and Customs (HMRC) - if it’s not registered, you won’t get tax relief.

What is a personal pension plan UK?

A personal pension scheme, sometimes also known as a personal pension plan (or PPP), is a UK tax privileged individual investment vehicle, with the primary purpose of building a capital sum and providing a vehicle to withdraw retirement benefits when you retire, although it will usually also provide death benefits.

Can I have a personal pension and a workplace pension?

Yes, you can have a personal pension whether or not you're employed, self-employed or even if you’re not working. This means you can have a personal pension to provide you with additional retirement benefits, even if you're a member of a workplace pension scheme. Again though, remember there’s annual savings limits and if necessary take professional financial advice before you begin. Most personal pensions are flexible and portable, and you can move pensions or merge pensions during your lifetime.

How does a private pension scheme work?

A private pension works in a very similar way to a workplace pension, but it's set up by you rather than your employer, and there's no additional contributions into it from an employer. When you reach the age of 55, it’s well worth taking advice on what to do with your pension. You should be able to choose between taking your private pension as a lump sum, using it to buy an annuity (a guaranteed income) or leaving it invested and taking out cash amounts when you need to via drawdown.

What happens to my private pension when I die?

Your pension scheme will normally pay out the value of your pension pot at your date of death. This amount can be paid as a tax-free cash lump sum provided you are under age 75 when you die. The value of the pension pot may instead be used to buy an income, which is payable tax free, if you are under the age of 75 when you die.

Are private pensions protected UK?

In the case of defined benefit pension schemes, you're usually protected by the Pension Protection Fund if your employer declares bankruptcy or for any other financial reason cannot pay your pension. The Pension Protection Fund usually pays 100% compensation if you've reached the scheme's pension age or 90% compensation if you're below the scheme's pension age.

Do you still get state pension if you have a private pension?

As long as you pay your National Insurance contributions, you'll be entitled to a state pension. ... You can also keep on working past your entitlement age and still receive your pension, or defer your state pension, whether you continue to work or not.

Is a pension REALLY worth it?

One of the main advantages 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. Saving in a pension gives you so many extra taxation benefits, that it’s always worth everyone’s while to prioritise pensions as a form of savings.

Tax relief on contributions.

The rules of tax relief and tax refunds for pensions are reasonably simple, however if you’re at all unsure you should seek advice from a professional financial adviser. You’ll get the tax back that you've paid on all you contributions, if you're under 75, subject to the annual allowance and limits. 

What tax relief do I get? 

You’ll get 20% tax back from the Government in most instances. If you pay the money into your pension yourself, or if it is taken by your employer from your pay packet, you automatically get that 20% tax back from the Government as an additional deposit into your pension pot without needing to claim it.

If you need to ask a pension adviser about these points, you should make sure you do so. It’s important that you know for sure where you fall into the tax rebate brackets. 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.

With other pensions, however, if you don't reclaim, it won't be paid: so it’s always worth checking.

How does the tax relief work on pensions?

To be clear on the calculations, when we say you’ll get 20% tax relief it doesn't mean you get 20% back of what you contribute overall. Instead, the 20% you get back is actually calculated on your pre-tax earnings. So for example, when a basic 20% rate taxpayer invests £80 of their take-home pay in a pension, they'd have actually earned £100 before tax. The tax relief is therefore going to be 20% of the £100 or £20 in total.

How much should I put in a pension?

Before starting, it's worth saying that anyone in any debt, especially if it’s debt at high rates of interest, should consider whether it'd be better to pay off that debt before starting a pension. It’s also worth noting that a pension is only one form of retirement planning. Combining it with other methods is often the best plan.

The basic advice with pensions is to put in is as much as possible, as early as possible. There's a very rough rule of thumb for what to contribute for a comfortable retirement, calculated as follows: -

  • Take the age you start your pension and halve it. 

  • Then put this % of your pre-tax salary into your pension each year until you retire.

  • Someone starting to save in a pension at the age of 32 should therefore be contributing 16% of their salary for the rest of their working life. 

Some basic rules to follow for pension saving.

Don't delay, start as early in your working life as possible. If you delay saving into a pension and start later in life, you'll need to contribute a much higher percentage of your pay to achieve a comfortable retirement. You’re not saving anything by starting later, so you may as well get started sooner. After all, the sooner you contribute, the longer timespan your money has to grow. The compounding effect of investment returns, coupled with your tax savings, can make a massive difference to your final pension pot over the long term.

Increase payments into your pension as much as possible, as often as possible. Try to put away a constant proportion of your earnings - the UK suggested target % is currently 15% - and, as your pay increases, making sure your contributions increase in pound terms by the same percent as your pay rise. 

Using the 'pay rise trick' is a great way to save for your pension. Most people will be unable to contribute enough at the beginning of their working life. So instead of worrying about it or delaying making a start, simply start with whatever you can, but each time you get a pay rise, put a quarter of the extra monthly cash into your pension until you reach that 15% amount.

How much can I put in a pension?

There's technically no limit on how much money you can put in a pension pot, or even into multiple pension pots - but there are limits on how much tax relief you'll get for doing so, so you need to be aware that eventually you’ll use up your tax relief limits. There are three different tax relief limits to be aware of overall. 

  1. Your earnings limit. You get tax relief on contributions up to your annual earnings ceiling. 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. Because your annual earnings are only £20,000, you would only earn tax relief on the first £20,000 of your contributions - but there would be nothing to stop you investing the total £30k if you chose to do so.

  2. Your annual limit. This limit really only affects higher earners, and is unlikely to ever affect anyone else. You can only get the pensions tax relief up to your current annual allowance, made up of the current years allowance (currently £40,000) and any unused allowance from the previous three tax years combined Since April 2016, anyone whose total income, pension contributions and employer pension contributions are over £150,000 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 individuals whose income (excluding pension contributions) is under £110,000 will be unaffected by these changes, even if pension contributions take them over £110,000.

  3. Your lifetime limit. The '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. If you’re under 40, it’s well worth considering a Lifetime ISA in support of your pension savings: ask a financial adviser for more details.

Ultimately, it’s well worth seeking professional financial advice to make sure you’re doing the most you can to maximise your pensions savings efficiency overall.

Start planning your future. Speak to us today.

Contact Us

Seventy Financial Planning
The Apple Store, Haggs Farm,
Haggs Road, Follifoot, Harrogate,
HG3 1EQ

01423 611004

[email protected]

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