I want to learn the pension basics

Pensions can be a good way to save for your retirement and provide a way to support you financially in the future.

We always recommend you get financial advice to help you make decisions about your pension savings and your retirement options.

What is a pension?

A pension is simply a way of putting money aside for when you retire. The money you put in is invested and builds up in a pot, so you can access it later on in life. When you're able to take money from your pension pot, the first 25% will usually be tax-free with the remainder being taxed as income.

A pension is tax-efficient and you’ll receive tax relief on the money you put into your plan. This will help reduce the amount of tax you pay and help you boost your retirement savings for the future.

Just like any other investments, the value of your pot can go down as well as up so you might get back less than you put in. You should keep track of how your pension is performing and make changes to suit you.

Tax rules can change and the impact of taxation (and any tax relief) depends on your circumstances and may be subject to change in the future.

We always recommend you get financial advice to help you make decisions about your pension savings.


What is a pension

How does a pension work?

You contribute regular savings into your pension, If you have a Workplace Pension your employer will make additional contributions, You'll receive tax relief on your savings, Your pension will have the potential to grow. When you reach retirement age you'll be able to take 25% tax free.

What are the different pension types?

Personal Pension

A personal pension is a pension you choose to set-up and pay into yourself. You can have a personal pension plan even if you don't work, are self-employed or your employer doesn't have a workplace pension. You can still contribute to one even if you're a member of a workplace pension or another pension scheme.

You can set these up on your own or through a financial adviser, but we always recommend you seek financial advice to help you make decisions about your pension savings.

The age you can access your pension pot is to increase to age 57 from 2028 and will affect anyone aged 47 and under. There are also situations where you could access your pension before age 55. You can read more on the gov.uk website.

Workplace Pension

A workplace pension is a pension scheme arranged by your employer to help you save for retirement. You’ll usually make regular payments directly from your salary and your employer will also put in money too.

State Pension

The State Pension is a regular payment that you could receive from the government when you reach State Pension age. The age and the amount you receive depends on when you were born and the amount of National Insurance contributions you've paid. Check your State Pension age on the gov.uk website.

Why pay into a pension?

To achieve the lifestyle you'd like in retirement

It’s important to consider how much money you’d like to live on and how long it needs to last.

To receive tax relief on your income

When you contribute to your pensions, you’ll receive tax relief on each payment, up to a certain limit.

Tax rules can change and the impact of taxation (and any tax relief) depends on your circumstances and may be subject to change.

To receive employer
contributions

With a workplace pension, your employer makes contributions to your pension, increasing the amount going into your pot.

To access tax free cash

From 55, (57 from 2028), you can usually take up to 25% of your pension free of tax and then decide what to do with the rest.

To allow tax efficient growth

Money in your pension pot grows largely free of tax which could help to boost the amount you have in your pot.

What are the tax benefits of a pension?

When you make a payment into your pension you usually receive tax relief from HM Revenue & Customs (HMRC). So the sooner you start contributing to a pension, the more potential your money will have to grow, but there are limits on how much tax relief you get on your contributions.

  • The money you pay into your pension usually attracts tax relief and this can be at your highest rate.
  • For workplace pensions, if your contributions are deducted before tax, then you don't need to do anything to get your full tax relief.
  • You don’t usually pay tax on your pension pot until you're ready to take money from it.

Just like any other investments, the value of your pension pot can go down as well as up, so you might not get back the amount you put in. You'll need to keep track of how your pension is performing and make changes to suit you.

Tax rules can change and the impact of taxation (and any tax relief) depends on your circumstances and may be subject to change in future.


What are the tax benefits

How tax relief works

If you’re a basic rate UK taxpayer you’re entitled to tax relief on your pension contributions. So, if you contributed £80, the HMRC would then top this by £20 giving you a total of £100 into your pension pot. If you’re a higher or additional rate taxpayer, you can also claim additional tax relief through your tax self-assessment form at the end of the tax year.

Through a workplace pension, contributions might be deducted directly from your salary before it's taxed. So, £100 would cost you £80 from your take home pay if you're a basic-rate taxpayer, £60 if you're a higher-rate taxpayer; or £55 if you're an additional rate taxpayer.

Tax relief limits

There are limits on how much you can pay in each year (known as the Annual Allowance) before you need to pay tax.

When you're ready to take your pension benefits, if all of your benefits exceed the Lifetime Allowance you may be subject to a tax charge. You might also have to pay tax when you start taking an income from your pension.

Understanding all of the tax rules can be complicated so we’ve prepared a helpful Questions and Answers document on pension limits and allowances to give you more information about how this might affect you.

If you’re unsure of how much to pay into a pension or the tax impactions, we recommend you speak to a financial adviser.

Over 50? Not sure how much you’ll get from your pension?

Not sure if you should be doing something with your pension? Not sure how much you actually have? Not sure if you should combine all your pots into one pension?

The ten years running up to retirement is a critical time in terms of planning for a good retirement.

An adviser can review all of your pensions, give you a clear picture of what you have and recommend the right actions you should take. 

If you don't already have an adviser, we can help. We offer a restricted advice service.

Find out more and arrange a chat

Keep track of your pension online

If you're an existing customer, your online service allows you to manage your pension whenever you like. Registering also means going paperless. So as well as being able to view important documents like your annual statement, change your personal details and contact us securely, you'll be helping the environment.

Online Service

Need more help? 

Money Advice Service

Find an independent financial adviser in your area to help you in your future pension planning.

Visit
www.unbiased.co.uk
and enter your postcode.

 

Pension wise logo

We recommend you use Pension Wise, a free impartial guidance service from the government to help you understand your options at retirement.

Visit pensionwise.gov.uk or call 0300 330 1001 to book a phone or face-to-face appointment.

Money advice service logo

An impartial money advice website, set up by the government to help improve your finances.

Visit
www.moneyadviceservice.org.uk
to find out more.

 

Money Advice Service

Visit hmrc.gov.uk to find out more information on tax rules and legislation which may affect you and your pension plans.