Getting to grips with the basics
Pensions are typically viewed as being complex and difficult to understand. As a result, people often delay starting one or ignore the issue altogether. In reality, though, the basics are relatively simple and taking time to understand them now could have a huge impact on your quality of retirement. Here, we’ll provide answers to questions our clients commonly ask and help guide you through the pensions maze.
What is a pension?
A pension is simply a type of long-term savings plan designed to help you save money for later life. In essence, it allows you to regularly save some of your earnings during your working life in order to provide an income when you decide to 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, funds or assets. Pension contributions also benefit from particularly favourable tax treatment, which makes them an extremely appealing investment proposition.
What types of pensions are there?
There are three major pension routes and most people fund their retirement through a combination of one, two or all three of these types.
Whatever type of pension plan you hold, you get tax relief at the highest rate of Income Tax you pay on all contributions you make subject to annual and lifetime allowances. This effectively means that some of your earnings which would have gone to the government as tax are diverted to boost your pension pot instead.
You can receive tax relief via either the ‘relief at source’ or the ‘net pay’ method. The ‘net pay’ method deducts the pension contribution direct from the pre-taxed income. So, for instance, if you’re 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 don’t 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. This only applies to the ‘relief at source’ method and doesn’t apply if the workplace pension is operating the ‘net-pay’ method of tax relief.
Is there a limit on how much I can pay into a pension scheme?
You can contribute as much as you like into your pension, but there is a limit on the amount of tax relief you will receive each year. The Annual Allowance is currently £40,000. An individual can’t use the full £40,000 Annual Allowance where ‘relevant UK earnings’ are less than £40,000,although your employer still could. You may be able to, however, carry forward unused allowances from the past three years, provided you were a pension scheme member during those years.
For the 2020–21 tax year the Tapered Annual Allowance limits altered. The Threshold Adjusted Income limit is £200,000 and the Adjusted Income Limit is £240,000. If your income plus pension contributions exceeds the Adjusted Income Limit, your Annual Allowance is reduced by £1 of every £2 you are over the Adjusted Income Limit.
A Lifetime Allowance also places a limit on the amount you can hold across all your pension funds without having to pay extra tax when you withdraw money. This limit is currently £1,073,100.
When can I access my pension?
The pension freedoms introduced in 2015 allow you to access your pension once you turn 55; from that point you’re free to take as much or as little as you like from your pension pot, whenever you like. While this has certainly introduced greater flexibility, it has also heightened the necessity to carefully consider your options. It’s therefore imperative to seek professional financial advice before accessing your pension to minimise potential tax implications and maximise the benefit you ultimately receive from your pension funds.
We’re here to help
We’re only a phone call away, so if you have any questions or would like to discuss the best pension options for your individual circumstances, please do get in touch.
We arrange bespoke solutions for our clients, providing a tailored one-to-one advisory service, delivered face-to-face or remotely, depending on what suits you.
Please click on ‘Become a Client, Enquire Now’ at the bottom of the page and complete the enquiry form and we will normally contact you within the same working day during business hours or if you would prefer us to contact you outside normal business hours then please advise and we will quite happily do so. Alternatively you can email us with details about your requirements to firstname.lastname@example.org or call us on 0151 372 0388
The above article is purely for information purposes and does not constitute advice.
The value of investments and income from them can go down. You may not get back the original amount invested. Information based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.
Past performance is not a reliable indicator of future performance. A pension is a long term investment the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.