10 important facts you need to know about pensions

10 important facts you need to know about pensions

Pension provider Aviva has revealed an interesting statistic about retirement plans. It found that just 40% of Britons believe they understand enough about pensions.

Furthermore, while 70% of those asked could confidently estimate the value of their savings, only 39% knew how much their pension pot was worth.

Pensions can be complex and carry tax implications, which is why you should always speak to an adviser when planning for retirement. That said, having a greater general understanding of your retirement fund could provide peace of mind and help you understand whether you’re on track to achieve your retirement goals.

With this in mind, read on to discover 10 clever tips that could help you get more from your pension.

1. Every £100 you contribute could cost £80 or less

The money you contribute to your pension typically gets an uplift from the government using tax relief. So, if you’re a basic-rate taxpayer, every £100 you contribute only costs you £80, and if you’re a higher-rate taxpayer, it costs just £60. Additional-rate taxpayers pay £55 for every £100 contribution.

2. The tax relief received on contributions is limited

The level of contributions that receives tax relief is limited to your Annual Allowance. In 2021/22 and 2022/23, this is £40,000 or the amount you earn, whichever is lower.

If you’re an additional-rate taxpayer, be aware of the Annual Allowance tapering rule. If triggered, it can drop your Annual Allowance to £4,000.

3. Not enough risk could jeopardise your retirement plans

Pensions are investments that typically consist of assets such as stocks and shares, government bonds and cash. As your pension’s growth usually comes from higher-risk stocks and shares, opting for a lower-risk pension could reduce its potential growth significantly.

This could reduce the value of your pension pot when you retire, which could also reduce your standard of living.

4. You could use your pension to reduce your Income Tax liability

If you are a higher- or additional-rate taxpayer, you may be able to use “salary sacrifice” to reduce your Income Tax liability. This is where you agree with your employer to reduce your salary and the difference is contributed to your pension.

This could drop your Income Tax from 40% to 20%, or 45% to 40%. Salary sacrifice could also reduce the amount of National Insurance contributions (NICs) your employer pays, and some firms  will even contribute the saving to your pension pot as well.

Always take care with salary sacrifice as it could affect your ability to get a mortgage and may affect other benefits such as death in service.

5. The charges associated with old pensions could be higher

According to the Telegraph, having an older pension could mean you’re paying higher charges. This means fees could be gnawing away at the value of your retirement fund.

While switching it to a newer pension might mean lower charges, care must be taken. Always speak to an adviser to confirm it’s right for you, and to ensure you don’t lose benefits with your existing plan that you’d probably rather keep, such as a guaranteed annuity rate.

6. “Carry forward” could mean you receive tax relief on larger contributions

If you have a significant lump sum such as an inheritance, you may be able to use “carry forward” to contribute more than your Annual Allowance and still receive tax relief.

Carry forward allows you to use unspent allowance from the previous three years. This could mean that you can contribute up to £160,000 (2021/22 and 2022/23), although certain stipulations apply.

7. Some employers pay into private pension plans

In some cases, employers will pay workplace pension contributions into an employee’s personal pension. As such, you might want to ask your employer whether they would be prepared to do this.

While this might provide you with more control over your pension fund, always speak to a financial adviser to ensure it’s right for you.

8. Be careful of the Money Purchase Annual Allowance (MPAA)

If you intend to work part-time and draw a flexible income from a defined contribution(DC) pension, beware of the MPAA. If triggered, it could reduce your Annual Allowance from up to £40,000 a year to £4,000.

This could restrict the amount of pension tax relief you receive and reduce its growth potential. If you would like to learn more about the MPAA read our blog.

9. You need to remember to update your “expression of wish” form

Pensions are not typically liable to Inheritance Tax, which is usually charged at 40%. This means that passing your retirement fund to beneficiaries could be a shrewd way of passing wealth in a more tax-efficient way.

If you intend to do this, ensure your “expression of wish” form is up to date. If not, your retirement fund could go to the wrong person.

For example, if you originally asked for the pension to go to your then spouse, but have since remarried, not changing your expression of wish document means your ex-spouse could receive your pension.

10. Consider increasing contributions to your workplace scheme

If your employer will match your pension contributions, be sure to contribute as much money as possible, subject to the Annual Allowance. Some employers will match your contributions even when it’s more than the 3% that they’re required to.

This could boost your pension pot substantially as it effectively doubles your money.

Get in touch

If you would like to speak to us about ways you could get the most from your pension, and potentially enjoy a better standard of living in retirement, please contact us by calling 0800 434 6337.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.