It's important to plan ahead for your retirement. Here, we explain why pension planning is so critical, and describe some of the options available to you. This information is intended only as guidance. For advice on your specific circumstances, please get in touch.
Transferring out of a final salary pension is unlikely to be in the best interests of most people.
The Financial Conduct Authority do not regulate auto enrolment.
What is a Personal Pension?
Personal pensions may be suitable if you're employed and not in a company pension scheme, or as an addition to a company pension. You may also wish to set up a personal pension if you are self-employed or if you are not working but can afford to put aside money for retirement.
You pay a regular amount (usually monthly or annually), or a lump sum to the pension provider who will invest it on your behalf.
Funds are usually run by financial organisations like insurance companies and unit trust companies.
The final value of your pension fund will depend on how much you have contributed and how well the fund's investments have performed. The companies that run these pensions charge you for starting up and running your pension. Charges are normally deducted from your fund in the form of fund management charges.
Contribution Levels and Tax Relief
The Annual Allowance for pension contributions is £40,000pa from 6 April 2022 with no change from the previous year. This figure includes total employee, employer and third party contributions.
Tax relief on personal contributions is given at up to the individual's highest marginal rate. This means that high-earning individuals can receive up to 45% tax relief on their contributions. However the £40,000 annual allowance is reduced for those with threshold income (taxable income excluding pension contributions) over £200,000 this is known as the Tapered Annual Allowance (TAA)
The Tapered Annual Allowance (TAA) came into force as of 6 April 2016 for high earners.
If you had earnings of £110,000 p.a. (post-pension contributions) (known as ‘threshold income’) you will not be affected by the TAA. From the 2020/21 the threshold income was increased to £200,000 and remains the same at 2022/23
From the 2022/23 tax year the limit for “adjusted income” remains unchanged from the increased level in 2020/21 at £240,000, and Annual Allowance is reduced to £4,000 when your adjusted income is £312,000 or more.
If you are affected by the TAA, you will still be able to carry forward unused Annual Allowance from previous tax years and if your income subsequently drops to below the threshold you will be restored to the normal Annual Allowance for that tax year.
If total contributions exceed the annual allowance the excess is added to the individual's income and taxed accordingly. The tax can either be paid by the individual or in some cases can be paid by a deduction from the pension plan (known as 'scheme pays').
You can carry forward unused annual allowances from the previous three tax years (ie. back to 2019/2020 for 2022/23), potentially allowing contributions of up to £160,000 in a single tax year for some people. HMRC has confirmed that you do not need to have made a contribution to a registered pension scheme in a tax year to be able to carry forward unused annual allowances from that tax year, but an individual must have been a member of a registered pension scheme at some point during the earlier tax year. The definition of a 'member' includes an active member, a pensioner member, a deferred member; or a pension credit member.
If you wish to carry forward unused annual allowance from previous tax years, you will need to have used up the annual allowance for the current year.
For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.
If you're subject to the higher tax rate of 40 per cent (up to 45% for additional rate taxpayers), you'll still get 40% or 45% per cent tax relief for any money you put into your pension that is matched by income in the higher or additional rate tax bands. But the way that the money is given back to you is different:
- You pay your contributions after deducting 20% tax relief and this 20 per cent tax relief is claimed back from HMRC by your pension scheme and added to your plan
- It's up to you to claim back the other 20 per cent if you're a higher rate tax payer or 25 per cent if you're an additional rate tax payer on some or all of the contributions when you fill in your annual tax return (higher or additional rate), or by contacting your Tax Office (higher rate only). This tax relief is given to you rather than being added to your pension plan.
- Your pension fund will invest the money you save (including the basic rate tax relief amount) in your pension. Your pension fund will benefit from growth and income from its investments and these accumulate free from tax.
Drawing your Personal Pension
You can take a pension commencement lump sum of up to 25% of the value of your pension savings (or 25% of your remaining lifetime allowance if less), which is currently tax free, when you reach minimum pension age (currently age 55). The lifetime allowance for the 2022/23 tax year is £1,073,100.
You then have two main options:
- Use the rest of the fund you have built up to buy an annuity (a regular taxable income payable for life) from a life insurance company. This does not have to be the same company that you have your pension plan with.
- Take a regular or ad hoc income (taxed at your normal Income Tax rate) from the remainder of your fund while it remains invested (known as flexi-access drawdown).
It should also be remembered that under the new pension flexibility rules, one-off lump sums may be available to be taken from the pension plan from age 55 onwards without moving the funds into flexi-access drawdown. These lump sums will be available subject to the scheme rules allowing, and will be 25% tax free and the rest taxable.
Putting Money into Someone Else's Personal Pension
You can put money into someone else's personal pension (eg. your spouse/partner, child etc). You will pay the net amount after deducting 20% tax relief and the pension plan member has tax relief added to their plan at the basic rate. You can’t claim any additional tax relief on your contributions though as the contributions are classed as having been made by the pension plan member (so if they were higher or additional rate taxpayers they could claim some tax back). If they have no earned income, you can pay in up to £2,880 a year (which becomes £3,600 with tax relief).For example, if you put £80 into a spouse or civil partner's pension scheme, the government would put in £20, so their pension pot would increase to £100. Your tax would remain the same.
The value of units can fall as well as rise, and you may not get back all of your original investment.
Scottish tax allowances and rates may differ. You should consult a financial adviser for more detailed information.
The tax treatment is dependent on individual circumstances and may be subject to change in future.
A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.