A personal pension is a money purchase scheme which is a tax-efficient long-term investment designed to provide you with an income in the future. Your employer may also contribute into this for you.
You cannot normally access money in a personal pension until age 55 (57 from 2028). The benefits you receive at retirement from your personal pension will depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed.
Will I receive tax relief on my pension contributions?
Depending on your personal situation you can receive tax relief on your personal pension contributions. The government usually adds money to your pension in the form of tax relief, so as a basic rate taxpayer the government will add £20 to your pension for every £80 you pay in.
If you are a higher rate taxpayer, you may be able to claim any higher rate tax relief you are entitled to through your self-assessment returns. So you still pay £80, receiving £20 tax relief at source, and then claim the further £20 through your self-assessment tax return, making the net cost effectively £60.
Additional rate tax payers, can reclaim further tax relief on pension contributions through an annual self-assessment tax return.
Tax relief is paid on your pension contributions at the highest rate of income tax you pay. Basic rate taxpayers receive 20% pension tax relief. Higher rate taxpayers can claim 40% pension tax relief and additional rate taxpayers can claim 45% pension tax relief.
In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way. Starter rate taxpayers pay 19% income tax but get 20% pension tax relief. Basic rate taxpayers pay 20% income tax and get 20% pension tax relief. Intermediate rate taxpayers pay 21% income tax and can claim 21% pension tax relief. Higher rate taxpayers pay 41% income tax and can claim 41% pension tax relief. Top rate taxpayers pay 46% income tax and can claim 46% pension tax relief.
Your personal pension provider if you are self-employed will claim basic-rate tax relief on your behalf, which will be added to your pension pot.
How are my personal pension contributions invested?
Most defined contribution personal pension plans offer a range of different investment funds that are designed to invest your money in different ways over the years until you reach your retirement.
Typically you will be able to decide to invest in one fund or to spread your money over a number of different funds typically via ready-made investment options. These funds are managed by professional investment experts.
Investment types may include investing in company shares, property and bonds, both in the UK or overseas. No tax is payable on income from investments or capital growth within the pension, provided they remain within the annual and lifetime allowances.
How do I take money from my personal pension?
Once you reach age 55, you can access your personal pension pot. You can either take some or all of it, to use as you need, or leave it so that it has the potential to continue to grow. It is up to you how you take the benefits from your pension pot. You can take your benefits in a number of different ways.
You can choose to purchase a guaranteed income for life via an annuity. You can take some, or all, of your pension pot as a cash lump sum, or you can leave it invested via flexi-access drawdown, or a combination of each. However you decide to take your benefits, you will normally be able to take up to 25% of your pension pot tax-free. The rest will be subject to income tax at the highest rate you pay.
It is good to have choices when it comes to pensions and your retirement, but it is also important to understand all of your options and any impact your decisions may have on your future financial security. How long your pension pot lasts will depend on the choices you make. You can read more about the various methods of withdrawing from your pension in our Pension Withdrawal knowledge article.
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. You should seek professional financial advice to understand your options at retirement.
What happens to my personal pension pot if I die prematurely?
Pension providers will usually take into account the people or good causes you want to leave your pension pot to when you die. Your beneficiaries will typically be given a range of options, however, not all pension types will let you do this so it’s important to check this with your provider if you are unsure.
If appropriate you may also have the option to transfer your personal pension plan to another provider, especially if your current provider does not offer the death benefits or flexibility you require. You should always seek professional financial advice before starting a transfer if you are unsure as transferring will not be right for everyone.
- Children’s pensions
- Defined benefit (or final salary) pensions
- Defined contribution pensions
- Personal pensions
- Self-Invested Personal Pensions (SIPPs)
- The state pension
- Annual allowance and lifetime allowance limits
- Busting myths about pensions
- Increases to pension age and new normal minimum pension age
- Pension freedoms
- Pension withdrawal methods
- The lifetime allowance
- Delaying retirement
- Generating income from investments throughout your retirement years
- Importance of a retirement wealth check
- Retirement goal setting
- Retirement planning
- Reviewing your retirement plan
- Staggered retirement
- Taking control of your retirement plans
- What can I do with my pension?
- What happens to my pension on death?
- Discretionary Fund Managers
- Market timing
- Minimising risk
- Multiple asset classes
- Portfolio insulation
- Pound cost averaging
- Principles of investing
Growing your wealth
Goals based investing
- Cash flow modelling
- Creating a financial roadmap
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- Timescales and market activity and the impact of losses
- ‘What if’ scenarios
- Discussing legacy planning with your loved ones
- Inheritance Tax (IHT)
- Inheritance Tax Residence Nil Rate Band (RNRB)
- Lasting power of attorney
- Lifetime transfers
- Making a Will
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- Protecting your assets for the next generation
- Slicing up your wealth pie