Pension FAQs: Your guide to pensions & retirement planning

Pensions can be complicated because there are different types of pensions, and different rules that govern them, plus also lots of options for what you can do with a pension when you want to use the money. It’s worth understanding the main concepts so that you can make choices that could have a significant impact on the quality of your retirement. Before making any decisions about pensions, you should always consult an independent financial adviser. Here we provide answers to commonly asked questions and help guide you through the pension maze. Getting to grips with the basics is an ideal place to start.

On this page:

• What is a pension?
• What are the different types of pension?
• Is there a limit on how much I can pay into a pension?
• How can I make my workplace pension better?
• When can I access my pension?
• Top pension tips
• What can I do if I want to retire but am not sure I can afford it?
• If I am retiring should I consider Equity Release?
• How we can help

What is a pension? 

A pension is simply a type of long-term savings plan designed to help you save money for later life. Fundamentally, it allows you to save regularly during your working life to provide an income when you retire or work fewer hours. The money contributed to your pension is usually invested, along with other pension savers’ cash, in some form of investment product. Pension contributions also benefit from particularly favourable tax treatment, which makes them more appealing than other types of long-term investment. 

What are the different types of pensions? 

There are three major pension options and most people fund their retirement through a combination of one, two or all three of these types. 

Personal pensions: These are sometimes called ‘defined contribution’ or ‘money purchase’ pensions. Basically, you pay a portion of your earnings into your pension pot which, along with tax relief, is then placed by your pension provider into a range of investments. The amount you ultimately receive in retirement will depend upon how much you pay into your pot, fund performance, the administration fees charged by your provider and how you ultimately take your cash. 

The State Pension: This is a weekly payment (currently £203.85 per week) payable at the State Pension age.  The State Pension Age for most people is now age 66. However, it is gradually rising to age 67 for anyone born after 6 April 1960 and to age 68 if you were born after 6 April 1977. Entitlement is built up by paying or being credited with National Insurance contributions (NICs) during your working life. You will need 10 qualifying years on your record to receive a state pension, the minimum of 10 qualifying years will only entitle you to receive a proportion of the full state pension amount.  To qualify for the new full State Pension, you need a 35-year NIC record. 

Workplace pensions: These are arranged for you by your employer and are sometimes called ‘company pensions’ or ‘occupational pension schemes’. Assuming you do not opt out, a percentage of your salary is automatically deducted, which is obligated to be topped up by a contribution from the employer, as well as tax relief from the government. The phased introduction of automatic enrolment since 2012 has now resulted in companies enrolling the vast majority of their staff into a workplace pension. 

Your workplace pensions can go overlooked and leaving them as they are initially set up, could be losing you money.

By looking into your workplace pension earlier and making any changes earlier, you could set yourself up for a larger pension pot at retirement, here, we look at an example of a pension:

• you have 40 years left until your nominated retirement age, 66.
• If everything stays the same, e.g. salary, pension contributions etc… then you could be looking at the below based on a few different growth rates:

As you can see in the example above, the difference between 2.9% growth pa and 5.9% growth pa (3% pa) could be worth over £550,000 when considering compounded growth.

How to make your workplace pension better for the future?

You could do the following:

• Make changes within the funds - this may or may not be appropriate to you depending on your attitude to risk, often your pension provider will have an attitude to risk tool for you to assess your own risk profile. 
• Transfer in other existing pensions - this will help add to the existing value and will make things simpler for the future when you come to access the money. You can often do this through your pension provider yourself or by speaking to a financial adviser. Often when the pension is started, any contributions into the plan are invested into a default strategy which may not be aligned to your individual risk appetite or broader financial circumstances
• Add additional contributions - you can do this by speaking to your manager to agree to add in a higher percentage of your salary. If you are a basic rate taxpayer, you will receive 20% tax relief on your contributions, if you are a higher rate taxpayer, you will receive 20% tax relief on your contributions and a further 20% through either a tax rebate or a change to your tax code. There is also the option to sacrifice a part of your salary, but this may not be appropriate for everyone.

If you are unsure of how to do any of the above or how to even get started, you can speak to your pension provider or contact one of our independent financial advisers.

Whatever type of pension plan you hold, you typically get tax relief at the highest rate of Income Tax you pay on all contributions you make, subject to annual and lifetime allowances.  

You receive ‘relief at source’ if you pay money into your personal pension yourself meaning you automatically receive 20% tax back from the government in the form of an additional deposit into your pension pot. If your workplace pension contributions are taken directly from your pay packet, they are paid gross of tax into your pension. So, for instance, in both circumstances, if you are a basic-rate taxpayer investing £800 of your take-home pay into your pension, the tax relief would amount to £200; effectively the taxman tops up your £800 contribution to £1,000. 

If you do not earn enough to pay Income Tax at all, you still qualify for tax relief up to a certain amount. The maximum annual contribution you can currently make is £2,880 which, along with tax relief, would amount to £3,600 a year being paid into your pension scheme. 

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

Although you can contribute as much as you like into your pension, there is a limit on the amount of tax relief you are able to claim each year. For 2023-24, this Annual Allowance is £60,000, or 100% of your earnings, whichever is lower. However, once you have used up the current year’s Annual Allowance, if you have unused allowances from the past three years, you can use these, by carrying them forward, provided you were a pension scheme member during those years, and your total contribution does not exceed 100% of your current year’s earnings. 

In an attempt to control the cost of pensions tax relief and to make sure pensions tax relief is fair and affordable, a Tapered Annual Allowance was introduced in 2016-17 which looks at an individual’s taxable income in the tax year - currently(2023-24), the Tapered Annual Allowance applies for individuals with ‘threshold income’ of over £200,000 and ‘adjusted income’ of over £260,000. 

For those who have flexibly accessed their pension, under the flexible pension rules, the Money Purchase Annual Allowance (MPAA) applies, which limits the amount of money which can be contributed to a money purchase scheme to £10,000pa, effective from 6th April 2023.  

Historically, a Lifetime Allowance also placed a limit on the amount you can hold across all your pension funds without having to pay extra tax when you withdraw money. For 2022-23 this limit was £1,073,100. However, changes announced in the 'spring budget statement' mean that the limit has now been removed.  Legislation could change again in the future, especially under a new government, so it is important to ensure that you are fully aware of the current rules before accessing your pension in order to avoid any unexpected or avoidable tax charges.

When can I access my pension? 

Pension freedoms introduced in 2015 allow you greater flexibility in how you can access certain pension pots from age 55; this will increase to 57 from 6th April 2028.  This greater flexibility gives more options but is only available on certain types of pensions and you should seek advice to assess what your specific options are.  

Top pension tips   

• Take advantage of free advice from Pension Wise - the government's free service that can help you understand what the options are for using your pension pot
• It's never too early – the sooner you begin, the longer your savings have to grow 
• But better late than never – favourable tax treatment and opportunities for investment growth can still make a huge difference 
• Don’t delay if you’re self-employed – as you are responsible for your own pension provision 
• Keep on track with regular reviews – to make sure you meet your retirement goals. Getting a State Pension Forecast will help your planning. 
• Nominate beneficiaries – so that your pension wealth can be passed on in the event of death  
• Take control of your retirement – consider the pros and cons of different options from age 55 
• Find old pensions - often people have more than one from different jobs in the past and it's easy to lose the details; you can trace pensions via the government's pension tracing service
• Most importantly, make sure you get good advice – it’s vital to get advice tailored to your own individual circumstances from an independent financial adviser.

What can I do if I want to retire but am not sure if I can afford it?

Many people find themselves facing this challenge, and although it isn’t an ideal situation, there are some steps you can take now to help bridge your funding gap.

• Know how much income you will need in retirement - drawing up a budget will help you get a feel for the level of income you’ll need to cover your costs in retirement. Some expenditures like travel to work will disappear, but you may find you spend more on gas and electricity as you’ll be at home more.
• Review your state pension provision - it’s very often the case that people nearing retirement are hazy at best about the amount of state pension they will receive. You can get a pension forecast from the gov.UK website here is s link to check your State Pension forecast.
• Consider consolidation of pension pots - if you’ve accumulated pension pots with various employers over the years, then it’s worth getting professional advice to review their worth and consider the possibility of consolidating them or transferring them to another scheme. 
• Consider boosting your contributions - even if you only have a few years left to retire, you can still benefit from the tax relief available on contributions and boost your retirement income. 
• Review salary contributions -you may be able to negotiate a reduced salary with your employer and put the difference towards your pension or use an annual bonus if you receive one.

If once you’ve reviewed your pension position and looked at other assets you hold that could be used to produce additional income, you’ll have a better feel for what your financial prospects in retirement will be. You could of course consider working past your normal retirement date, or decide to change careers, work part-time or do consultancy work if these possibilities are open to you.

If I am retiring, should I consider Equity Release?

Many people approaching retirement find themselves with low incomes whilst living in properties that have increased considerably in value over the years. In these circumstances, it’s worth thinking about downsizing to release funds. If the thought of leaving familiar surroundings feels like a step too far, then equity release can provide a means of unlocking the wealth tied up in your property to provide a lump sum or an income. In most cases, this is achieved through taking out a loan against the property that is repaid on death, or when the occupant goes into residential care. Opting for this solution would reduce the value of your estate on death, so you would need to discuss this with your family, and professional financial advice is essential.

How we can help 

Our expert pension advisers will help you see the bigger picture and talk to you in plain language to help you understand your options.  

They will start by finding out more about important factors such as your attitude to risk, investment perspective and tax position. Understanding your relationship with your finances will help your adviser create a plan that encompasses what you want your money to accomplish for you and your family in the years ahead. 

So, if you would like to discuss your pension options and retirement planning, do get in touch. We are only a phone call away. You can be sure that all our advice and recommendations will be focused on getting you the best possible result. 

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks. Some information quoted was obtained from external sources we consider to be reliable.

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