Pensions can be confusing, particularly with upcoming changes to legislation surrounding them. It’s essential, when retirement planning, to understand about the funds you will have available to you. This will, in turn, enable you to adjust pension contributions as necessary to ensure you can enjoy the retirement you hope for. In this article, we’ll answer some of the most common questions about pensions, to ensure you have a good understanding of pension basics.
What is pension tax relief?
Pension tax relief is a top-up given by the government to pension contributions. It is an incentive by the government for individuals to invest in their retirement, as your pension pots will grow more quickly without you having to do anything. For higher- and additional-rate taxpayers in particular, tax relief makes contributing to your pension a tax efficient investment.
The amount of tax relief you receive is determined by your tax band. Basic rate taxpayers will receive an additional 20% directly to their pension pot. So, to save £100 into your pension pot, you need only contribute £80 yourself. The other £20 comes from HMRC. Higher- and additional-rate taxpayers can claim an additional 20% and 25% respectively through their tax returns. This is paid directly to the individual, not into your pension pot.
How much should I be paying into my pension?
There is no definitive amount you should pay into your pension. It will depend on your personal and financial circumstances at any given time, along with what your retirement plans are.
There are limits, though, on how much you can save each tax year into your pension pot. This pension allowance covers all contributions into all pension schemes that you contribute into. Private pensions and both employee and employer contributions into workplace pensions are included.
You may contribute up to £60,000, or 100% of your ‘relevant earnings’, whichever is lower, each tax year. Those earning over £200,000 per year may be subject to a tapered annual allowance. You can read more about this in our previous blog post.
No matter how much you invest in your pensions each tax year, all growth* within them is free from both income and Capital Gains Tax.
How much pension will I need to retire?
Again, there is no definitive answer to this question. It largely depends on what your plans are for your retirement. Plans to travel the world will require more funds than maintaining your current living standard, for examples.
Each year, Pensions UK along with Loughborough University, release annual figures giving average income requirements in retirement for different living standards. These are known as the Retirement Living Standards. The most recent data for income required after tax shows:
Minimum standard (covering all essentials, with some left over for fun): £13,900 (1 person) | £22,500 (2 people)
Moderate standard (providing more financial security and flexibility): £32,700 (1 person) | £45,400 (2 people)
Comfortable standard (allowing more financial freedom and some luxuries): £45,400 (1 person) | £62,700 (2 people)
What is pension carry forward?
Should you use your full pension annual allowance in a tax year, but have unused allowance from the past 3 years, you may carry the unused allowance over. It allows you to contribute more to your pension this year. You can check if you have unused allowances on the government website.
Remember, though, that your pension contributions may not exceed your total earnings for the current tax year. So, you should use unused allowances from the earliest eligible year first.
What is auto-enrolment?
Auto-enrolment, in relation to pensions, refers to a government initiative in 2012 to get more people saving for their retirement. If you are an employee over the age of 22, working primarily in the UK, and with pre-tax earnings of over £10,000, you are eligible for pension auto-enrolment. Your employer is obliged to enrol you into their chosen pension scheme and begin contributions. A minimum of 8% of your salary must be contributed, with 5% coming from the employee and 3% from the employer. You may choose to contribute more, and some employers match employee contributions as an employee benefit. Of course, you may choose to opt-out of your workplace pension if you choose.
Learn more about auto-enrolment and what it means for your retirement in our previous blog post.
What happens to my pension when I change jobs?
Should you move employers, contributions to your previous workplace pension will cease. Your pension pot will remain in place, potentially benefiting from growth*, but no further contributions will be made. Assuming continued eligibility, you and your new employer will begin contributing to their chosen pension scheme.
Should I increase my pension contributions after a pay rise?
It can be a good habit to get into, to increase pension contributions when you receive a pay rise, subject to allowances. If you do this before you are used to the extra money, you won’t notice any detrimental impact now, but it could benefit you greatly in your retirement.
Can I have more than one pension?
Yes, it is certainly possible to have more than one pension. Those who have a workplace pension and private pension will have at least two pensions. If you have worked for more than one employer since October 2012 you may have more than one workplace pension, albeit only one active one.
Should I combine my pensions?
There are many benefits to combining your pensions. These include less admin of keeping track of your pension providers and lower pension management fees. Having more funds in your pension pot may give you access to greater investment opportunities, too. Pension pots benefit from the power of compound interest. This interest remains in your pension, building your pot more quickly. So, the more funds you have in a single pension pot, the greater the potential growth* for your pension.
How much is the state pension in the UK?
The State Pension in the UK rises each tax year. In the current tax year, pensioners receiving the new State Pension will receive £12,547.60 per year, or £241.30 per week. Those who reached pension age before April 2016 will receive the basic State Pension. This is £9,614.80 per year, or £184.90 per week.
When can I claim my state pension?
To be eligible for the full State Pension, you must have 35 years of qualifying National Insurance contributions. The government website provides a check for your State Pension forecast, to help you determine if you will be eligible. This can be incredibly useful when planning your retirement.
Currently you must be 66 to receive the State Pension. This is set to rise to 67 between 2026 and 2028, affecting those born on or after 6th April 1960. The State Pension age is set to rise to 68 between 2044 and 2046 for those born on or after 6th April 1977. Retirement age is subject to change, but you can check your current retirement age on the government website.
What happens to my pension when I die?
At the moment, unused pensions are exempt from Inheritance Tax (IHT) estate calculations. This means they can be passed on to loved ones with no IHT considerations. However from April 2027, this is set to change, being included in the deceased’s estate value.
An exception to this is if the estate and pension will be passed to a spouse or civil partner. When the first person in a marriage or civil partnership dies, the deceased’s assets are not subject to IHT. The nil-rate band (the allowable estate value before IHT is due) passes wholly or in part to the partner. This could result in a nil-rate threshold of £1,000,000 including their residence, for the surviving partner. Unused pension values will be included in IHT calculations upon the death of the surviving partner.
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We hope this article has given you a greater understanding of some pension basics. For more information, or if you have any further questions about your pension, please contact our expert team. You can call us on 0116 222 0119 or email hi@willdaywm.co.uk.
*With investing your capital is at risk and you may get less than what you invested
