Auto-enrolment
Since 2012, employers have had to enrol eligible workers in a pension scheme. You can opt out if you want, but the idea is that you are less likely to leave a pension than start one. Once in the scheme, your employer must make payments worth at least 3% of your salary. You must put in the equivalent of at least 5% of your pre-tax salary. But many experts say that isn’t enough. Phoenix Insights, a thinktank, says the current 8% total minimum contribution “is too low for most savers to achieve an adequate retirement income, and may be giving some a false sense of security”. So consider increasingupping your payments if you can.
Basic-rate taxpayer
Contributions into a workplace scheme are usually paid before you are taxed. For a basic-rate taxpayer, this means a contribution of 5% of your salary into your scheme will reduce your take-home pay by 4% – so it will cost you £40 to pay in £50. For other workplace schemes and personal pension schemes, the provider will typically claim back the basic-rate tax (20%) for you and pay it into your fund.
Carry forward
There is a maximum sum you can pay into your pensions in each tax year before you have to pay tax. Currently it’s £60,000 for most workers (those earning more than £200,000 may have a reduced figure). But, as an extra perk, you can use any annual allowance you have left over relating to any of the last three tax years, as long as you earn at least the same amount you want to pay in. That could be useful for people nearing retirement who want to top up their pension, and those who have had a pay rise/promotion, says the Association of Taxation Technicians. As an example, if you paid in £20,000 this year, you could use the remaining £40,000 allowance for 2024-25 in one of the next three tax years.
Defined contribution
With this type of pension, you know how much is going in each month but you don’t know how much you will get at the end. This is because the money that goes in is invested (see Underlying investments). How much it grows will depend on how well the investments perform. Most private sector workers in the UK are now offered this type of scheme.
Ethical questions
An estimated £88bn of the £3tn in UK pensions funds is invested in fossil fuel firms, and there could be other holdings you disagree with. But there are things you can do. Your workplace pension scheme’s default fund may not be very green, but many offer an ethical or sustainable option, so do ask about that. David Macdonald, the founder of the ethical adviser Path, says: “Many more people are starting to think about green pensions.” Funds he likes include Pictet Water, BlueBay impact-aligned bond fund and Columbia Threadneedle global social bond fund.
Final salary
This type of pension, also known as a defined benefit scheme, gives you a guaranteed income for life, typically based on your income in the last few years of your career. If you are lucky enough to be in one of these schemes, you should probably stay where you are. “For most people, the certainty of a secure lifetime income from a defined benefit scheme is the best form of retirement provision,” says Steve Webb, a former pensions minister who is now a partner at the consultancy LCP. But, he says, there may be some cases where a transfer is attractive. “This could include cases where there is already enough secure income from other sources [including a spouse or partner], or where the potential for someone to inherit any unspent pension balance on death would be important.”
Guaranteed income
If you are not in a final salary scheme, you could use your fund to buy a product called an annuity. This gives a guaranteed payment, usually monthly, for the rest of your life, or a fixed term. How much it pays depends on several factors including how much money you have to spend on it, your age when you buy it and your state of health – the longer the company expects to pay an income for, the lower the monthly payment it will offer. For a non-smoking 65-year-old, a £100,000 pension will currently buy an annuity that pays up to £7,550 a year.
Higher-rate taxpayers
People who pay tax at 40% or 45% get extra tax relief on their pensions – but may have to claim it through self-assessment. If you are paying into your pension before you are taxed, you will be getting the benefit without having to do anything. Otherwise you’ll need to do some paperwork as your scheme may only be claiming 20% on your behalf. The relief will be limited to how much of your income you pay the higher rate on. So if £14,000 of your salary is taxed at that level, you will only get the extra relief on up to £14,000 worth of contributions a year. When you are doing your self-assessment form, you put down the gross figure – so if you pay in £8,000, you gross this up for basic-rate tax and report a £10,000 figure on your tax return.
Inheritance tax
It was announced in the budget that unspent money left in a defined contribution pension when you die will be included in inheritance tax (IHT) calculations from April 2027. If you planned to leave money this way you may want to talk to a financial adviser and/or review your will.
Junior pensions
You could consider setting up a retirement fund for your children. Starting early means the pot has decades to grow in value and can take advantage of compounding, where you earn returns on your returns. Pensions have the added benefit of not being accessible until retirement, whereas with a Junior Isa, the child can withdraw the cash at 18. “You can open a self-invested personal pension (Sipp) for anyone under 18. You can pay a maximum of £2,880 a year into this, which becomes £3,600 through 20% tax relief,” says the financial adviser website Unbiased.
Know what you’re going to get
Forewarned is forearmed. Go to gov.uk/check-state-pension to find out how much state pension you could get, when you can take it and how to increase it (if you can). Those in a workplace scheme or with a personal pension should get an annual statement telling them what they are in line to receive. If you haven’t had a statement for a while or can’t find the latest, ask for one.
Lifetime Isa
This government scheme lets people save for a first home costing up to £450,000, or for their retirement. People can pay in up to £4,000 each year until they are aged 50, and the government will add a 25% bonus to their savings, up to a maximum of £1,000 a year. If you don’t use it to buy your first home you can access the money at age 60.
Married couples and those in civil partnerships
Both will still be able to inherit pensions without paying IHT. If one partner dies, the other may also qualify for a larger state pension each week. When it comes to your other pensions, often final salary schemes have restrictions so that only a spouse, civil partner or child aged under 23 can receive regular payments after you die. Defined contribution schemes tend to be more flexible and let you nominate whoever you want as the beneficiary. If you are under 75, they will be able to take out the money tax-free (except possibly inheritance tax – see above). All regular pension payments are subject to income tax, as are lump sums if the deceased was 75 or over.
New state pension
It’s not actually that new, as it came into effect on 6 April 2016 and is paid to anyone who retired from then on, but it is referred to as such to distinguish it from the pension paid to people who retired before that date. The full value is now £221.20 a week, usually paid to you every four weeks, but you could get more or less, depending on your number of national insurance qualifying years (see below) and whether you paid into the additional state pension that was part of the old system. There’s more on the new and basic state pensions here.
Old pensions
It is estimated there are about £20bn of lost and forgotten pension pots waiting to be reunited with their owners. This is often money that people paid into a former employer’s pension scheme and then forgot about or lost track of. If you are struggling to track down an old pension, give the government’s online Pension Tracing Service a go. You can use this to find contact details to search for a lost pension (it won’t tell you whether you have a pension or what its value is). You can also call the service on 0800 731 0175. Meanwhile, Gretel is a free service you can use to trace lost pensions, accounts and investments.
Personal pension
This is a scheme you organise yourself or pay into directly. It is a defined contribution scheme, and you decide how much you want to pay in each month. You don’t need lots of cash: the insurer Standard Life will let you open a personal pension with as little as £1. Many people pay in monthly, and some firms let you pay in as little as £10 or £25 a month, but to build up a decent retirement fund, many experts suggest you put away 12.5% of your monthly pay. You won’t get money from your employer but will get tax relief. Your money will go into funds (see Underlying investments). Typically run by insurance firms, though you may be offered one via your bank or another provider, these schemes tend to work for the self-employed and people who move jobs a lot.
Qualifying years
Your state pension will be based on your record of making national insurance contributions. To be entitled to any new state pension, you will need to have 10 qualifying years on your record. These can be contributions you made when working – if you are an employee, they will have been taken out of your pay before you got your money, credits you received while you were a parent, carer or looking for a job, or voluntary payments to make up for missing years. Your state pension forecast will tell you how much you have built up.
Retirement age
The state pension age is now 66 for men and women and is due to rise to 67 between 2026 and 2028. For other pensions there is a minimum age at which you can access your cash – it’s currently 55 in most cases but will rise to 57 in April 2028. That will affect people born after 6 April 1973. If you are terminally ill you may be able to get your money earlier. You don’t have to have stopped working to access your pension. You no longer have to start drawing your pension by the time you are 75, but once you get to that age, there is no advantage to paying more in as you won’t get tax relief on your contributions.
Self-invested personal pension
Sipp is a personal pension but with more options about where your money goes once it is in your pension account. You can invest in shares, funds and commercial property, among other things – and it’s your job to decide how much to put where and when to move it. They are offered by lots of providers, including investment companies. Shop around, because there are fees and they vary, and different providers offer different investment choices.
Tax-free lump sum
When you reach the minimum age, most pension schemes let you withdraw a lump sum worth up to 25% of your savings that you will not have to pay income tax on. That applies across all pensions you have, but it is capped overall at £268,275 – for which you would need a pension or pensions worth £1.073m. You don’t necessarily have to take it all at once (or at all) – you can withdraw it in chunks.
Underlying investments
Almost all pension schemes need to invest their money to make it grow (there are some “unfunded” schemes that operate differently, including the teachers’ pension scheme). With a final salary scheme, you don’t really need to worry about this (unless you have ethical concerns), but with a defined contribution scheme, you should take an interest, as the value of your pot will go up or down depending on how the investments perform. “While checking fund performance daily would be excessive, it does make sense to check periodically that your money is invested in a way that is right for your stage of life and attitude to risk,” Webb says.
Voluntary contributions
You can top up your workplace pension with additional voluntary contributions (AVCs). Some employers will boost these up to a set limit – perhaps adding 50p for every £1 you pay in. AVCs benefit from tax relief, so for a higher-rate taxpayer, that £1 will only cost 60p. If you are 50-plus and can afford it, this is a no-brainer. Free-standing additional voluntary contributions (FSAVCs) are similar and also designed to sit alongside your workplace pension, but you set this up yourself via a pension provider, and the FSAVCs are collected from you directly and invested.
Withdrawals
You can’t usually take any money from your pension before you are 55 (there are some rare cases when you can). If you have a defined contribution pension (see above), you can usually start taking an income or lump sums, or both, from 55 onwards. Lots of people finance their retirement via pension drawdown. With this, your pension pot (what’s left after the tax-free lump sum has been taken) remains invested, so it will hopefully grow in value, and you take a regular income, or amounts as and when you need them.
Exes
Your pension savings will be taken into account if you divorce, and could form part of the financial settlement. If a judge decides it should be divided between you and your former partner, there are two ways this can happen: pension sharing or earmarking. The first sees some or all of the pension transferred into the other person’s name, and they get complete control over it. The second sees a portion of the pension designated to the other person, but they have no control over how it is invested or when it is paid – that remains with the original pension holder. Another alternative is offsetting, where the pension is left untouched, but something equal to some of its value is given to the other person.
Young workers
Auto-enrolment into pensions starts at 22, but if you are younger than that and earn £6,240 or more a year (in the current tax year), you have the right to opt into your employer’s scheme. If you do, you will be entitled to the minimum level of employer contributions. If you earn less than £6,240 a year, you can ask your employer to give you access to a pension, and it has to do this, but it doesn’t have to pay any money in. If your employer lets you join its scheme and will contribute, too, you really should consider joining.
Zero-point 75
You are likely to have to pay some charges for a pension plan to cover the cost of managing it and investing your contributions, but many people will be paying an amount with a “0” at the beginning. “If you are in a workplace pension and haven’t made any special fund choices, you will be paying a maximum of 0.75% in charges [known as the “charge cap”], and often a lot less than this,” Webb says. For an older pension plan, it is worth reviewing the charges, says the government-backed MoneyHelper website. Those who opt for a Sipp (see above) can get the all-in fees down to a very low figure. The investment company Vanguard offers one of the cheapest deals: if you manage your investments yourself, the total fee is from 0.21% a year, depending on the funds you choose (that includes an account fee of 0.15% of your investments a year).