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Pensions Q&A

There is a lot of 'jargon' used in the finance industry.  We have tried to provide you with a comprehensive explanation of all the terminology that you may come across during the pension process.

Who can invest in a personal pensions?

You can get a personal pension whether you're employed, self-employed or out of work as long as you are: 

  • 16 or over
  • A UK resident
  • Happy to leave your money invested until you retire

If you want to retire on more than the state pension but don't have a company pension at work, a personal pension is a great option.

Taking your pension benefits

Firstly you can't get your hands on your pension until you're at least 55 years old, which is good because it gives you time to build up a bigger pension, without the temptation to dip into your savings.

When you take your benefits you can normally choose to take up to a quarter of your benefits as a tax-free cash sum. 

What are your options?

  • Leave your pension fund invested
  • Enter drawdown, which means taking some of your money whilst leaving the rest where it is.
  • Withdraw cash in one go or you can take a number of lump sums until all funds have been exhausted.
  • Purchase an annuity.
  • Go with a combination of all the above   

Please remember, the amount of income provided by your pension will depend on a number of factors, including investment returns and annuity rates when you retire.

How much can I save?

A little now makes a big difference later- the golden rule is to invest the most you can afford, and the earlier you start the better. Even a modest amount saved now can make a big difference later.

You get tax relief on everything you put away, up to 100% of your annual earnings (and also subject to an upper annual allowance of £40,000*).

Even if you're not earning you can still pay into your personal pension, and get tax relief on up to £2,880 of contributions each year.

*Please note, you don't get tax relief on payments above £40,000, in fact you will be taxed on them. If you have unused allowance from previous tax years, you may be able to pay in more than this. To find out more, please see Questions & Answers. Also remember, this information is based on our current understanding of taxation law and HM Revenue & Customs practice in the UK. The amount of tax relief you receive depends on your personal circumstances and may change.

How much can I pay in?

You can pay in anything from £1 upwards. You get tax relief on everything you put away, up to 100% of your annual earnings (subject to an upper annual allowance of £40,000). If you are able to save more than £40,000 a year, you don't get tax relief on payments above that, in fact you will be taxed on them. If you have unused annual allowance from previous tax years, you may be able to pay in more than this. Please see below.

Can I pay in more than £40,000 in one year?

Yes, but any contributions above this will normally be taxed.

You may be able to avoid this by carrying forward any unused annual allowance from previous tax years. There are some rules around this, you can only go back three years, you must have been a registered member of the scheme in the tax year you are carrying forward from and you can only carry forward up to the £40,000 limit in each tax year.

Don't forget this includes any contributions from an employer and increases in value of any other pension savings you may have.

Can my employer pay in ?

Yes, their payments would form part of your total contribution limits.

If you'd like your employer to contribute, just let us know and we'll send you a form making it easy for them to do.

Can I save in other pensions too?

Yes, you are allowed to save in as many pensions as you like. There used to be rules concerning company directors and occupational schemes and salary limits, but these have now been removed.

If you already have a pension which you could make further contributions to, you should speak to an IFA.

Can I transfer other pensions to my new pension?

Yes, you can transfer other pensions into a new pension, however, you would need to make sure it was the right thing for you to do. If you would like more information please contact us.

Can I start a pension if I plan to retire within five years?

Yes, you can. But if you haven't started a pension yet and are hoping to retire within five years time, we strongly recommend you seek independent financial advice, so you can decide on the best options available to you at this time.

How do I claim the tax relief?

Whether you are employed, self-employed or not employed, your provider can claim basic rate tax relief for you and invest it in your pension.

If you pay income tax at the higher rate (or additional rate that applies for those with an annual income above £150,000) you can claim any extra tax relief you are due from the HMRC in your annual tax return.

What happens if I change jobs?

The first thing is to find out if your new employer offers a company pension, and whether they contribute to it. If so, you should join, so you don't miss out on any payments they're offering. You can also keep your personal pension, and keep paying into it if you wish.

If you become self-employed or your new employer doesn't offer a pension scheme, it's a good idea to keep paying into your personal pension so your retirement savings stay on track. 

Whatever you choose to do, please let us know if you've changed jobs.

What happens if I'm off work?

If you're off work but are still being paid (e.g. paid maternity leave or sick leave), you can continue to pay into your pension and you'll still receive tax relief on your payments (on up to 100% of your annual earnings and also subject to an upper annual allowance of £40,000). If your employer is paying into your pension, you'll need to check with them whether they'll continue to contribute while you're off work. 

If you have time away from paid work, remember you can stop payments into your personal pension if you need to. You can start saving again whenever you wish. If you do make payments into your pension you'll still receive tax relief on up to £2,880 of payments each tax year, even if you have no earnings for that tax year. You can pay in more than that if you wish but you won't receive tax relief on the extra amount.

What happens if I stop work all together?

Even if you're not earning you can still pay into your personal pension and receive tax relief on up to £2,880 of payments each tax year. You can pay in more than that if you wish but you won't receive tax relief on the extra amount.

If you can no longer spare the money you can stop your payments into your pension. You can start saving again whenever you're ready.

What happens to my savings if I die before I retire?

The pension can be assigned or paid to the beneficiaries i.e. under pensions freedom a pensions pot can go down the generation if need be.

What is the earliest I can retire?

The earliest you can currently take your pension is your 55th birthday. Certain proffessions can retire earlier than this.

What happens when I 'cash in' my pension fund?

You can normally take up to a quarter of your savings as a tax-free cash sum. 

Are there any risks I need to know about?

Investing in stock market shares is not without its risks. They can rise significantly in value over many years, go into periods of decline, or fall suddenly in value, with no guarantees you will get back the full amount you invest.

The key point to remember is that saving into a pension is a long term investment, and the longer you remain invested in the stock market the better you tend to do.

Remember...

You can't access your pension savings until you retire. Under the current rules, even if you retire early, you are not able to claim your pension before the age of 55. Also, the amount of pension income provided by your retirement fund will depend on a number of factors, including investment returns and annuity rates when you retire.