Pensions The Basics
Pensions: The Basics
What is a pension?
Put simply it is a long term savings plan that is really tax efficient and is designed to provide you with an income when you retire.
What are the main benefits?
Tax Relief – you receive 20% tax relief on the money you pay in. In simple terms, if you pay in £80 per month, the Government will add £20 per month bringing your total contribution to £100 per month. There is a cap in terms of how much you can pay in during the tax year and how much tax relief you can receive, which is linked to your earnings and a maximum limit (known as the Annual Allowance), but even those who are not working and earning can save up to £2,880 per year into a pension and the Government will gross this up to £3,600. For higher and additional rate taxpayers you can claim additional tax relief (an extra 20% / 25%) via your tax return.
Employer Contributions – with the introduction of Auto-Enrolment in 2012, all employers are now under a legal requirement to enrol eligible workers into a pension scheme and must contribute 1% of your qualifying earnings until 06/04/18, rising to 2.0% until 06/04/19, then rising to 3.0%. This is a valuable benefit and you should think very carefully before opting out of your employer’s pension as you are effectively missing out on both the tax relief and the employer contribution.
Tax-Free Growth – once you have invested money into a pension all of the growth is tax-free; however the maximum value of benefits that can be paid out of all your pension funds (known as the Lifetime Allowance) is currently £1m. It may be possible to protect your Lifetime Allowance above the £1m limit depending on your specific circumstances.
Tax-Free Lump Sum – once you reach the minimum pension age (currently age 55 but this is set to increase in line with the State Pension increases), you can take up to 25% of the fund value as a tax free lump sum.
Flexible Income – April 2015 saw the introduction of ‘Pensions Freedom’ which means you now have control and flexibility in terms of how and when you generate income from your pension fund once you reach the minimum pension age (and as long as your pension provider caters for it). This effectively means that if you didn’t have any other earnings, you can take up to £11,500 (the current personal allowance) out each year before any income tax is due. There is also no National Insurance to pay on pension income!
Death Benefits – if the worst happens, the pension fund can be passed onto your chosen beneficiaries tax-free. It is however important to ensure that you complete a death benefit nomination form!
Natalie Wright, Chartered Financial Planner
Mazars Financial Planning Ltd
This information is in relation to defined contribution pension schemes i.e. Personal Pensions, Group Personal Pensions and SIPPs and is correct as at 17/08/17.