The secret to a successful retirement is to build up your pension pot slowly and surely. Exactly how you do that will depend on your situation – but there are lots of things you can do.
Nearly all people who are currently working, or have worked, are likely to have been a member of a pension scheme. This could be via an occupational pension scheme, set up by an employer for their employees, or an individual pension set up by a person on their own.
A pension is a pot of cash that you, and your employer, can pay into – which, depending on your earnings, you get tax relief on – as a way of saving up for your retirement.
There are many different types of pension arrangements available, from state pension schemes offering limited financial support in old age, private pension plans giving you the freedom to build a larger fund for your retirement and occupational pensions where your employer also contributes to your pension pot.
It is a tax-efficient way to put money aside for later in life, to provide income for when you retire. It is best to put in as much as possible, as early as possible.
Depending on the type of pension you have, you and your employer can pay into it.
The government also ‘contributes’ to your pension in the form of tax relief. The amount you receive depends on your income tax bracket – for example as a basic rate tax payer, for every pound you invest in a pension, the Government will pay in a top-up of 20% of the value of the contribution, up to a maximum of the lower of your annual income or £40,000 per year.
Your pension pot is invested in your choice of pension funds, from the selection offered by your chosen pension provider. The idea is that the funds grow over time, maximising the value of the fund so you can get the highest possible income in retirement.
Once you turn 55 (expected to rise to 57 in 2028) or retire, you have several options for how you choose to take your pension income.
On retirement, usually up to 25% of your pension fund value may be taken as a tax-free cash lump sum. The remainder of the funds left in your pension pot is used to take an income, either by way of an annuity, or by taking cash directly from your pension fund (drawdown).
The income your pension provides you in retirement will vary from provider to provider and will depend on the investment choices you make, the performance of the pension funds, the level of contributions you make and the charges applied.
Note: Each pension company will vary in both charges and investment performance. As with all investment, the value of your investment can go down as well as up.
Also known as company pensions and occupational pensions, workplace pensions are offered by employers.
Employers in the UK are required to have a pension scheme set up and they must automatically enrol their eligible employees.
In both instances your employer helps by also making contributions to your pension – meaning you can build up a larger pot than if you were contributing alone. So if you don’t join the scheme, you are effectively turning away extra money from your employer. The downside is that you are restricted to the pension scheme that your employer has chosen.
Occupational pensions don’t have to stop if you leave an employer – you can still contribute to a money purchase scheme after you leave. Although your previous employer’s contributions will stop. Even a pension you are no longer contributing to remains invested and is still subject to charges from the fund and pension provider.
A personal pension, also known as a private pension, is a type of pension you can set up yourself. You can have a personal pension even if you already have a pension through your employer.
There are three main types of personal pension:
The state pension is a pension you’ll receive from the government once you reach the state retirement age (currently rising from 65 to 66), provided you have at least ten years’ worth of qualifying national insurance contributions or credits and meet the other eligibility criteria laid out by the government.
The amount you get will depend on the national insurance (NI) contributions you’ve made throughout your working life. The government will then pay you your state pension – a guaranteed income – for the rest of your life.
The basic state pension is taxable, but if you don’t have any other income, you won’t be taxed. You only start to pay tax if you earn more than £12,570 (in the 2022/23 tax year).
The triple-lock system benefits those receiving the state pension. It determines how much pensioners will receive in state pension income each year. This means every April the state pension amount increases by the highest of:
In 2021, the Government decided to suspend the triple lock for the 2022/23 tax year as the increase in average earnings was skewed by the pandemic. Whether or not the triple lock remains in place past 2024 remains to be seen.
The state pension triple lock has proved to be a burden for successive governments, as it has proved costly for the taxpayer.
Overall, around 60% of the Department for Work and Pensions benefit spending went to pensioners, with the State Pension, at £104.7 billion, accounting for almost half of all spending. The cost of the State Pension increased by £2.8 billion from 2020/211.
To discuss any of the issues raised in this article, please contact us. Further information can also be found at gov.uk.
1 DWP State Pension expenditure in 2020/21 £101.9bn and in 2021/22 £104.7bn DWP Annual Report & Accounts (https://www.gov.uk/government/publications/)
Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.
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