Pensions Advice

Have you ever dreamed of being given a gold watch and heading off to enjoy your retirement knowing that your pension would pay for everything going forward? Well, the gold watch may be a thing of the past, but a comfortable retirement doesn’t have to be. It just takes more planning than it used to. 

There are so many options when investing in a pension that it can sometimes be easier to bury your head in the sand and just let it run in the background. But doing this can set you back years and push your retirement further away. It’s really important to get involved with your pension and make sure you are getting regular advice on how you and your pension are progressing. 

How does a pension work?

In essence a pension is a savings account that has been given generous tax rules to encourage you to save for your retirement. You invest some of your income whilst you are working, so that you can have an income when you stop working.

There are two main types of pensions: Defined Benefit and Defined Contribution

Transferring out of a Final Salary scheme is unlikely to be in the best interests of most people.

Defined Benefit pensions are only offered by a few companies and will pay a certain level of income from your retirement until your death. The level of income depends on certain factors such as how long you were in the company’s pension scheme and your salary. This type of pension can be very valuable and are normally much more attractive then the alternatives. However, there are circumstances where it may be in your interest to ask to transfer to your own Defined Contribution pension.

Defined Contribution pensions have become the standard pension for both personal and company pension plans. These plans do not have a specified income that you will receive in retirement, instead you accumulate a retirement fund. It is then up to you how you use this fund to provide you with an income when you retire. Defined Contribution plans are much more flexible and you have a lot more choices than ever before, from where you invest your pension to who you wish to leave it to when you die.

There are many factors that determine how well your pension will work for you:

  • How much and how often you pay in to your plan
  • The company who provides your pension plan and how much they charge
  • The investments you choose and how well they perform
  • The amount of investment risk you are willing to take
  • The options your plan will give you when you want to retire
  • The overall cost of running your pension plan

I spend a lot of time investigating clients’ pensions and delve into the finer details around these points and more. It is an important exercise and can make a significant impact in helping you to achieve your retirement goals, and maybe even allowing you to retire even earlier.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

Tax Advantages of a Pension 

Other than preparing you for retirement, the immediate benefit of contributing to a pension is that the government gives you tax relief on contributions up to your annual allowance. This means for every £80 you contribute the taxman will top it up to £100. If you are a higher or additional rate taxpayer you can reclaim the extra tax relief via self-assessment. 

When you come to take benefits from your pension 25% of your fund value tax-free (up to a limit of £268,275). The remaining amount will be classed as income for tax purposes as and when you take it. As most people pay a lower rate of tax in retirement than when in employment this is very tax efficient.  

Whilst your funds are invested inside a pension all the growth whether it is interest, dividends or capital are both income tax-free and capital gains tax-free. 

If you are a business owner, then paying contributions from the company can be even more tax efficient as it can be treated as a deductible expense for corporation tax. 

Tax treatment varies according to individual circumstances and is subject to change.



How much can I pay into a pension each year?

In theory there is no limit to how much you can pay into your pension in any year. However, there is a limit to how much you can claim tax relief for, this is called your Annual Allowance. If you pay more then your Annual Allowance you will still receive tax relief on the contribution, but will have to pay it back at the end of the year.

The Annual Allowance is dependent on your level of income but has a maximum of £40,000 for the 2020/21 tax year. It may be possible to carry forward unused Annual Allowance from previous years allowing you to maximise your contribution.

When can I take my money?

There are multiple parts to this question but the earliest you can normally access your pension is at age 55. But of course, your pension plan is there to provide you with an income for the rest of your life and the earlier you access it either the less income you will get or the earlier it will run out.

It is important to plan your retirement carefully to give yourself the best chance of reaching the income level you need from your pension funds.

What should I do with old pensions?

It is very common for people to build up several pension pots throughout there lifetime, whether personal plans or through different employers. It is likely that you will have plenty of options as to what you can do with these but there is no simple answer for all old plans.

A common answer is to consolidate all pension plans into a modern pension where you have greater access to investments and more options in how you take your benefits in retirement. However it is very important that each plan be looked into carefully as some old plans will have benefits that are very valuable today.

How much is state pension?

The state pension is currently set at £175.20 per week for someone with 35 years of qualifying, contracted-in, national insurance contributions. You can check how much you should be entitled to here

The full state pension works out at just £9,110.40 per year. That really is not very much at all. This shows how important it is to save into your pension and the earlier you start the better.

Top tips for your pension

  • It’s never too early to start! – Due to the way compound interest works, for every additional year your invested the potential value at retirement increases dramatically
  • It’s never too late to start! – There is always a benefit to paying into a pension even if you think you only have a few years of working left
  • Pay more if you can – I’ve never seen anyone who has retire and wished that they had paid less into their pension
  • Stay in your company pension scheme if you can – your employer will be contributing into your plan as well as you, but they will stop if you do
  • Get advice – Everyone is different and so are their circumstances. A good financial adviser will talk you through your options and recommend the best one for your individual circumstances. This can make a massive difference when it comes to retiring.

What happens to my work pension if I change jobs?

If you change employer whilst being enrolled in the company pension scheme then what would normally happen is that your pension will remain yours and either your pension will be treated as a deferred pension and remain where it is but will receive no further contributions or it may be disconnected from the company scheme. If this happens you still keep the benefits you have built up but it becomes a personal pension.

What can I invest in?

This depends on the provider and pension contract you have.

The most common investment in a pension are what is known as investment funds. Older plans tend to be much more restrictive with the choice of investments and would typically range from a choice of c.50 investment funds to some plans only offering 1 fund.

Due to advances in technology modern contracts tend to have a much greater range with a typical plan offering a choice of c.1,500 different investment funds.

When should I start saving into a pension?

The earlier you start saving the greater the impact your savings will have. For example, a 45 year old who starts saving £500pm, getting 5% investment growth a year, will have accumulated a fund of £206,737 by the age of 65. Whereas if they started saving at 35, their fund would have grown to £417,863. That’s more than double!

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    Areas I Cover

    Based in Southampton the majority of my clients are located in Southampton, The New Forest, Lymington, Winchester, Lyndhurst, Chilworth, Romsey, Hamble, Netley, Sarisbury, Locks Heath, Whiteley, Hedge End, Botley, Fair Oak, Wickham, Twyford, Otterbourne, North Baddesley, Wellow, Beaulieu, Diben Purlieu, Brockenhurst etc.

    I also travel to clients in Ringwood, Bournemouth, Salisbury, Andover, Portsmouth, Chichester, Guildford, London, Basingstoke, Oxford and further.