Posted on 18/12/2024 by Mark Dunning
Oh I wish it could be Christmas every day. Imagine later in your life having the means to enjoy your lifestyle doing the things you want to without financial constraint or worry. Are we there yet? We hear a lot about pensions and mostly from a negative perspective, however, this may be because people are not taking advantage of the benefits pensions still offer and therefore could be missing out on.
A pension is a tax-efficient way of saving money for your retirement – it is a long-term savings plan. Pensions are tax-efficient in that there is no tax to pay within the scheme e.g. capital gains or income tax and you also receive 20% tax relief at source on your personal contributions e.g. pay-in £100 and you are credited with £125. You can claim further tax relief via a self-assessment annual return if your marginal rate of income tax is above the basic rate i.e. higher or additional.
There are different types of pensions. One of the most common is a workplace pension, where both you and your employer contribute. You may also have a personal or private pension that you have set up for yourself. You can save into several different pensions, as long as you stay within your annual limits.
The fundamentals are fairly consistent across the board:
Ideally, your pension pot grows as you pay into it as the value of your investments rise. Of course, the value of your investments can fall too, so in challenging financial times your pot could shrink rather than grow – which could also represent a buying opportunity and better value for your hard-earned money.
When you can access your pension, usually you can take up to 25% as a tax-free lump sum. You can then decide what to do with the balance, whether that is starting to withdraw some or all of the money, or to keep paying in. If you continue to pay in you may be subject to the Money Purchase Annual Allowance (MPAA) which is a reduced annualised allowance – this is based on whether you have drawn an income or not and doesn’t apply to taking tax-free cash.
The government sets a limit on how much you can pay in to your pensions each year before incurring tax charges. This is called the 'annual allowance'. For the 2024/25 tax year, the standard annual allowance is £60,000. This is a combined total across all of the pensions you are paying into - this amount could be lower, depending on your individual circumstances i.e. your total earnings. There is, however, the potential to utilise a carry forward option which could enable you to contribute more than the allowance.
To help people save more for their retirement, employers now have to enrol their eligible workers into a workplace pension scheme. This is called ‘auto-enrolment’.
In some cases, your employer will contribute to your pension regardless of whether you pay into it or not. In most cases though, they’ll expect you to pay in too.
The amount of money you will need from your pension(s) depends on various factors, including:
So simply put, the sooner you start saving and the more you pay in, the more options you could have in retirement.
Once you reach your 55th birthday (rising to 57 from April 2028), you can take your pension at any point, and in different ways:
Before deciding what to do with your pension/retirement planning, whether you are just starting out, checking-in to see where you are or approaching retirement itself, shopping around to make sure you are making the right choices could prove vital.
It may also turn out to be crucial that you re-visit any plans that you have made with your existing pensions as due to the recent Budget of October 2024, these may now be affected in the near future.
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.
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