Most people do not want to work forever, so it makes sense to put some money away for when you get older.
Saving a little from income regularly during your working life can provide an income in later life, when you aim to work less or retire completely.
There are several types of pension schemes, some ran by your employer and others you can set up personally.
A unique feature of saving in a pension, is they provide tax relief on the contributions you personally make. For example, a basic rate tax payer who contributions £80 to a pension scheme will receive £20 tax relief, making the total contribution £100.
Higher rate tax payers can claim additional tax relief through their annual tax return.
The pension annual allowance is the limit to the amount that can be paid into a pension scheme each tax year, this is dependent on your pension qualifying earnings up to a maximum limit of £40,000. The amount you can pay in, can reduce if your earnings are high, or you have previously taken money from you pension. With a pension employer contribution, contributions are not limited to earnings, and your employer can benefit from a corporation tax saving.
Even if you do not earn an income, you can still make a healthy pension contribution of £3,600 per annum.
Your pension scheme is ultimately designed to provide you with an income in addition to the State Pension. The single tier State Pension can be as much as £179.60 a week, although you may be entitled to more given your personal circumstances. You can always check your current State Pension forecast here.
When the time comes to take your pension options, with the pension UK age being 55 for most, there are a number of choices. These include taking money as tax-free cash, a regular secure income or drawing an income direct from the pension fund itself.
There are benefits to all approaches, and with pensions freedom introduced in 2015 the options available can include a combination of all three methods.
How much you get will depend on the type of scheme you have.
If you have a defined benefit pension scheme, you will receive a guaranteed level of income based on your final salary and the number of years’ worked.
These pension schemes are very valuable and few and far between in today’s pension landscape.
If you save into a defined contribution pension scheme, the value of your pension can go up or down but your savings usually grow when investing long term. At retirement the amount of income you receive is dependent on how much it costs to buy that income, or you can use a drawdown pension where your money remains invested and your income comes from the money invested.
No matter how old you are, there is always value in saving into a pension scheme, particularly if your employer is also willing to contribute, and the sooner you start saving the larger the potential value in the future.
It is important to note that the pension lifetime allowance also places limits on how much you can accumulate in pensions during your lifetime. At the moment this is £1,073,100 with any savings over this amount becoming taxable.
When you die, your pension scheme can provide benefits. If you are in a defined benefit pension scheme, there may be an income payable to your dependant and a lump sum in some circumstances.
Under a defined contribution scheme, it may be possible for a lump sum to be paid to your dependant, or they could receive an income.
With new pension legislation, it
is also possible for your unused pension funds to be passed on to someone else in
the form of their own pension. This provides the recipient with greater options
to use the fund at a time more appropriate to their individual circumstances.
From determining your pension UK age, how much you will get, pension employer contributions available, to using the pension annual allowance and the pension lifetime allowance, it is advisable to seek the service of an Independent Financial Adviser. If you would like to discuss any of these topics in more detail, please contact our Norwich Office on 01603 619620. Our staff will be able to help and where necessary arrange for you to speak with a specialist.