Pension Planning

When you retire, there are several ways you can take funds from your pension pot. You don’t have to choose just one option, as they can be mixed to suit your needs.

• In one lump sum
• In several lump sums and leave the rest invested
• Drawing down on a regular basis, leaving the rest invested
• Buy an annuity

A defined contribution or DC pension is the most common workplace pension offered by employers, but you can set up your own DC pension too. It is a pot of invested money, built up by contributions from you and/or your employer. When you retire, the size of your DC pension will depend on how much has been paid in, how your pension savings have been invested and how they have performed, and the tax relief you have received.

A defined-benefit pension or DB pension is a workplace pension, which is a promise of a level of income from a stated retirement date. The value of income provided depends on the number of years you have been part of your employer's scheme, your salary there and the factors your employer uses to calculate your income. DB pensions are also known as final salary or career average schemes. For example, if you have a final salary scheme that operates on a 1/60th accrual basis, where you worked there for ten years earning £50,000 per annum, your pension would be: 10/60 x £50,000 = £8,333.33 per annum

The state pension is a payment received from the Government usually every four weeks. The full rate of the new State Pension will be £221.20 per week in 2024-25, paid from age 66.  The government has legislated for an increase from 66 to 67 in 2026-28 and to 68 in 2044-46.

You can have as many pensions as you like, however it is important to note that the more pensions you have, the harder it is to keep track and manage the investments alongside your various allowances. 

As a UK taxpayer, you can pay up to 100% of your relevant earnings into a pension. If you do not have any relevant earnings you can still pay up to £3,600 per annum into a pension. Remember the annual allowance for pension contributions also applies, in 2024/25 this is £60,000 a year. You do not need to have relevant earnings for employer pension contributions.

Relevant earnings are broadly your salary plus taxable benefits. This does not include rental income, dividends, interest and other forms of income. Remember that the relevant earnings definition is different to adjusted income for the tapered annual allowance (see below). There are far more sources of income included when calculating your adjusted income for the tapered annual allowance. 

The annual allowance is the maximum amount you can have paid into your pension each year and still receive tax relief. The standard annual allowance is £60,000 for the 2024/25 tax year. You can carry forward any unused allowance from the previous three tax years, so it is possible to pay more than £60,000 if you have enough relevant income or your employer is looking to pay into your pension.

The tapered annual allowance is set at a lower value than the annual allowance and applies to individuals with a threshold income of over £200,000 and an adjusted income of over £260,000. Once your adjusted income exceeds £260,000 your annual allowance is reduced by £1 for every £2 of income above the limit. Once your income exceeds £360,000 you will be limited to a £10,000 annual allowance for pension contributions.

The adjusted income definition is very broad and includes employer pension contributions, so detailed calculations are required. The rules for the tapered annual allowance changed in April 2019, so you must review your position if you have been or are affected by this.

It depends on several factors: how much you can afford to save, what you need in retirement, your tax position and your investment risk profile. Typically the earlier you start the better. While it is important to save as much as you can, you need to be careful not to exceed the various annual and lifetime limits for pension savings.

There are many options to choose from. You can leave it where it is, transfer it into a new scheme or take the benefits when you retire. It is worth speaking to a financial planner to understand the best option for you. 

If your employer is paying your maternity leave, you both will continue to pay into your pension for at least 39 weeks, with your employer contributing based on your full salary. Thereafter it depends on the employment and pension contract. If you’re not being paid, your employer will continue paying into your pension for the first 26 weeks.

You can consolidate your pensions into one, as it makes them easier to keep track of and manage the underlying investments. However, it’s important to seek financial advice before doing so to understand if this is the right approach based on your current circumstances and retirement plans. 

The right choice for you depends on a range of factors: your attitude to risk, your capacity for loss and how you plan to access your pension to name a few. Typically, the further away from retirement you are the more risk you can afford to take to get additional growth. 

Currently, you can start drawing from your pension when you are 55. The minimum access age is increasing to 57 by 2028, but some pensions will allow you to keep an access age of 55. If you think this could affect your retirement plans you should seek advice.

Most pensions can only be set up on an individual basis, but you can still pay into a pension for a partner or spouse. As these pensions are held in separate names you can’t have a joint pension with your married partner. However, if your partner isn’t working, you can pay into a pension for them or set up a joint-life annuity.

For business owners, it is possible to set up group schemes with pooled funds, which allow you to access options such as buying a property for your business to operate from or making a loan to the company.

Yes, you can take your pension all in one go. However, only 25% of it will be tax free so it is important to speak with an adviser to understand what is the best option for you when it comes to withdrawing funds.

Pensions are unusually exempt from Inheritance tax however there are instances where this is not the case. While usually free of Inheritance Tax, pensions can be subject to Income Tax if death is after age 75, so it is important to seek advice when thinking about how to pass on your estate in a tax-efficient manner.