Are pensions complicated?

Older man using an electronic tablet in the park.

Pensions can be complicated and there are lots of things to consider when it comes to pension planning. But if you spend some time getting your head around the fundamentals and take advantage of all the freely available information, then you’ll be halfway to affording the retirement lifestyle you’d like. And that’s definitely worth the effort. 

Either you can set up a pension scheme for yourself – a personal pension – or you can join the pension scheme offered by your employer – a workplace pension. You can also do both and have more than one pension, although if you have too many it can be difficult to manage them effectively and you could end up paying more than you need to in charges.

Our article on pension consolidation – reducing the number of pensions you have – will explain how this works.  

Tax relief

No one wants to pay more than they have to in tax, and saving into a pension is one way of getting some money back from the taxman.

If you pay into a personal pension, you’ll receive income tax relief on the contributions you make. Say, for example, you decide to contribute £80 each month, the government will add a further £20 to your pot. This tax relief means that for every £100 that goes in, you only contribute £80.

If you’re a higher or additional rate taxpayer, you can also claim higher or additional rate tax relief on your contributions via your self-assessment tax return.

There are limits on how much you can put into your pension before charges apply and this is called the annual allowance. The annual allowance applies to all of the contributions made by you or a third party – an employer or family member – across all of your pensions.

You can get tax relief on 100% of your eligible earnings, up to a maximum of £40,000. If you contribute more than this amount, you’ll have to pay a tax charge.

If you have no earnings, contributions of up to £2,880 can still be made into your personal pension and will attract relief at the basic rate of income tax, taking your contribution up to £3,600.

The majority of pension savers will not breach the annual allowance and our free guidance service – Aegon Assist – can take you through the technicalities in more detail. If you’d like financial advice, we can also help you find a financial adviser

If you’re a higher or additional tax rate payer or have started drawing pension benefits, then you should consider seeking guidance or getting financial advice as there are additional rules around the annual allowance to factor in.

So yes, it can get complicated, but it’s worth figuring out for the tax breaks on offer.

Workplace pension

A workplace pension is one that an employer has set up for its employees. The government is in the process of rolling out its Auto-Enrolment legislation, which demands that all employers offer eligible employees access to a compliant pension scheme and sets minimum contribution levels for both you and your employer.   

Up to the 5th April 2018, minimum contributions levels will be 1% for the employer and 1% for you, rising to 5% for the employer and 3% for you, from the 6th April 2019. You’ll get income tax relief on your contributions, and those made by your employer will boost your pension pot even higher.

You can opt out of your employer’s auto-enrolment pension if you want, but that would mean giving up their contributions and so you’d be saying ‘no’ to free money.

Managing your pension savings

It’s up to you to decide where the money that goes into your personal or workplace pension is invested. There are many different investments to choose from and so unless you’re confident about what you want to do, you should seek professional advice.

What’s really important is that you don’t just forget about where you’ve invested your pension pot and that you monitor its performance and review your decisions regularly.

Over the course of a lifetime, the performance of your pension investment savings can make a huge difference to how much you have to generate an income for later life. And so keeping a keen eye on them is essential.

Don’t stick your head in the sand

Saving money into a pension lets you benefit from tax relief. If you’re saving into a workplace pension scheme then you’ll also get the added benefit of receiving contributions from your employer.

Paying for later life when you’ve slowed down in your career or stopped working is expensive. The sooner you start saving, the more you’ll be able to take advantage of these breaks and the bigger your pension pot will be.