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How to Start a Pension – A Complete Guide for UK Investors

Everyone should be asking how to start a pension, regardless of age or circumstance. Failing to consider your retirement could result in a reliance on the meagre state pension which is a far cry from being an adequate amount for a comfortable retirement that could last 20 to 30 years.

In our guide on how to start a pension we cover all the information you require to set up the best possible pension plan for your circumstances, and not only this, we will also make recommendations for the best pension provider for you.

Top Pension Providers in the UK

Rank Pension Provider Description Link
1 Interactive Investor Interactive Investor is running a SIPP promotion where you don’t pay any fees for 6 months Open a SIPP
2 Hargreaves Lansdown Hargreaves Lansdown is a leading UK SIPP Provider for UK investors Open a SIPP
3 Fidelity Investments The SIPP from Fidelity is an easy way to start your pension as you can start with as little as just £50 per month, or with a lump sum of £1,000. The Fidelity typical service fee is a low-cost 0.35% plus ongoing charges. Open a SIPP
4 Pensionbee Pensionbee specialises in combining your existing pension schemes into one pension which you can then manage and contribute too in an easy to use interface. They offer a fantastic service for anyone who has accumulated different work pension schemes over a career. Please note you need to move at least one existing pension in order to use the service Transfer your Pension
5 Nutmeg A Personal Pension investment platform that marries the shiny new robo advisor platform with the trappings of a more traditional stockbroker. For new accounts, Nutmeg is offering 6 months 0% Portfolio Management Fees Open a Personal Pension
6 Saxo Markets Excellent, user friendly trading platform and extensive product portfolio
Visit Site
7 IG Investments Multiple options for funding and withdrawing money and great educational tools Visit Site
8 AJ Bell Youinvest One of the cheapest options for small and medium portfolios with an easy to use platform phone, ipad and laptop Visit Site
9 Freetrade SIPP With its recently launched SIPP, Freetrade is a great option for robo-advisor style, simple pensions Visit Site
10 Penfold Specifically aimed at self-employed people looking to start a new pension Visit Site
11 Moneyfarm Moneyfarm offer an easy to set up SIPP and you can transfer your pension to them too Visit Site
12 Moneybox You can track down your old workplace pension pots and combine them into one simple Moneybox Personal Pension Visit Site

What exactly is a pension?

A pension, simply put, is a pot of money that you have saved to provide for your retirement. Depending on the sort of pension plan you have, you or your employer can make sporadic or regular contributions to your pension. One of the most attractive things about a pension is the generous tax relief you receive, allowing you to make the most of your income.

At what age can you access your pension?

A pension can be accessed when you turn 55 and not before, removing the temptation to dip into your retirement savings. However, the UK government has plans to extend this to age 57 in 2028 so people saving for their pensions today may want to factor this into their plans.

The exception to this is the state pension which cannot be accessed before the age of 66. Once you reach the state pension age you will qualify for £179.60 a week at the top end of the scale.

How much pension will you need?

This depends on your current lifestyle and how you wish to spend your retirement. The Pension and Lifetime Savings Association released their Retirement Living Standards which covers the average cost of goods and services and found that the minimum amount a single person would require is £10,200 a year, and for a couple, this amount is increased to £15,700. Whilst you would stretch to one annual holiday and possibly be able to eat out once a month, in order to live a life which is free from financial stress and covers entities such as clothing and renovations, you would need closer to £20,200 for a single person and £29,100 for a couple.

At the top end of this scale, £33,000 would afford a retiree a more luxurious lifestyle and this amount is extended to £47,500 for a couple.

How much should you start saving now?

Always save as much as you can afford into your pension, this can help you take full advantage of the generous tax breaks on offer and ensure you end up with a comfortable retirement. However, those in debt should look to rid themselves of that before they start saving into a pension especially where high-interest rates are involved.

To give pension savers a guide on how much they should be looking to put aside for their pension, experts recommend taking the age you start your pension and halving it. This number then becomes the percentage of your salary that should go towards your pension. As an example, someone who starts saving into a pension when they are 40 will need to put aside 20% of their salary until they retire. This is part of the reason it is so important to start saving as soon as possible as someone who is 20 will only need to contribute 10% of their salary into their pension. Of course, this figure includes any pension contributions that your employer makes so isn’t as daunting as it may appear.

For a more accurate way of calculating how much you need to save, you can use the Money Advice Services Pension Calculator which will provide you with an estimate of your retirement income.

Is it worth saving into a pension?

Definitely. There are two main reasons why it’s a great idea to save into a pension. The first is that the contribution your employer makes acts like a pay rise, and whilst you won’t see this money today, you will benefit from it later. The second major advantage to saving into a pension is the generous tax breaks they attract. Not only will you get back some of the tax on the money you contribute into a pension, but you can also enjoy tax-free gains from the investments you make within your pension.

What tax relief will I get on my pension?

The UK Government will automatically give you 20% tax relief for a basic rate taxpayer on any pension contributions you or your employer make to your pension. This is paid as an additional deposit to your pension pot. A higher rate taxpayer can get an additional 20% tax relief and an additional rate taxpayer can claim an additional 25% tax relief.

This tax relief is available on 100% of your income, so if you were to pay your entire salary into your pension pot, you would get tax relief on the entire contribution. However, should you receive an inheritance worth several times your income, you will not avoid taxes by depositing it all into your pension.

Often, your pension provider will add your tax cashback to your pension pot for you, and if you are part of a workplace pension scheme then it is likely your employer will simply deduct less tax from your pay packet. However, there are circumstances whereby you will need to claim this tax relief yourself.

Pension contribution limits

There are a number of limits as to how much you can contribute to your total pension pot whilst still earning tax relief. You are at liberty to exceed these limits, however, you will not earn tax relief on any pension contributions over and above the limit. These limits are as follows:

The earnings limit – You can only earn tax relief on pension contributions up to the value of your annual earnings. Let’s say for instance you had an inheritance of £30,000 which you decided to deposit into your pension, however, your annual earnings were only £20,000, you would only earn tax relief on the first £20,000 you deposited.

The annual limit – The current annual allowance is £40,000, however, any unused allowance from the previous three years can be rolled over. High earners should be aware that the annual allowance will begin to taper for anyone whose income is above £240,000.

The lifetime limit – There is a lifetime allowance of how much you can save into a pension without getting a tax charge. This is currently £1,078,900 and will be frozen at this amount until 2026.

All these allowances include contributions by your employer or anyone else into your pension pot.

At what age can you start a pension in the UK?

You are never too young to start saving into a pension, and even small amounts saved in childhood can have time to grow into substantial amounts. Child pensions can be opened by parents and carers and provide a tax-efficient means of saving for your children’s retirement. It’s important to note that should you set up a pension for your child, this pension money will not be available until they reach the age of 55, even if they require it for the purchase of a home or to pay for higher education as an example.

Your first pension – the options

The first step towards starting a pension and saving for your retirement is choosing the right kind of pension for your circumstances. The following pensions are available:

Workplace pension scheme

A workplace pension scheme, also known as company pensions and occupational pension schemes are set up by an employer and any money you contribute to your pension is topped up by both your employer and by the government in the form of tax relief. A workplace pension is often considered the most efficient way to save into a pension.

Personal Pension

A personal pension is a pension that you arrange and manage yourself. This can be in addition to a workplace pension or as a stand-alone product. There are three main types of personal pension which include:

Traditional personal pension

A traditional personal pension allows you to invest in your own pension account with or without an employer.

These schemes are the most basic of the available accounts because you typically only have two investment options: insurance company funds and cash.

What is an Insurance Company Fund?

Most personal pensions are offered by insurance companies, which is what limits their investment product portfolio. As a result, you invest in insurance policy funds.

Insurance company funds are those run by life insurance companies. You might have the offer of a fund run by the insurance company that offers the pension or the chance to invest in funds run by other managers.

As with all funds, your money is pooled.

How does an insurance company fund differ from insurance? Your fund is a financial instrument that fluctuates with the market and according to your preferred investment strategy. Insurance policies and their benefits do not.

For example, if you buy a life insurance product, then you will receive the benefits as stated according to your plan. They will not (or should not) change. An insurance policy fund in a pension product depends on market performance.

Stakeholder pensions

Stakeholder pensions may be offered by employers, but you are also free to open one yourself. As with SIPP products, you have more options than just your insurance company’s fund offerings, but your choice is limited in comparison to SIPP products.

One of the biggest differences from a SIPP product is that the UK government regulates the minimum standards, which means the barrier to entry is lower. As a result, you’ll find:

  • Limited charges
  • No transfer charges (in or out)
  • Low minimum contributions
  • Flexible contributions
  • Default investment options

The default investment option is the biggest difference compared to the SIPP product. A SIPP requires you to make your own choices, but a stakeholder pension gives you a default fund if you decide not to choose.

Self-Invested Personal Pension or SIPP

A Self Invested Personal Pension is a financial product that makes it easy for you to choose your own investments within your personal pension fund. These products allow you to choose your investments as you see fit, without the limitations of a traditional personal pension or a stakeholder pension.

The investments available to you through most Self Invested Personal Pension products include:

  • Unit trusts
  • Investment trusts
  • Open-ended investment companies (OEICs)
  • Exchange-Traded funds (ETFs)
  • UK shares
  • Overseas shares
  • UK bonds (and other fixed-interest securities)
  • Permanent interest-bearing shares (PIBS)
  • Cash

Although you do have many options, it’s worth noting that you can also choose ready-made portfolios if it best suits your needs or level of investment knowledge.

What are the Tax Benefits of a SIPP Product?

Your SIPP works the same way as any other personal pension. You can contribute as you like, and the government pays 20% in through pension tax relief for a basic rate taxpayer. If you are a higher rate taxpayer in the 40% income tax bracket, then you can claim back more tax relief on your income tax return. Additionally, your money grows without the need to pay UK income tax or capital gains tax on your personal pension income.

What is auto-enrolment?

Auto-enrolment is the new way that employers are forced to offer a workplace pension to their employees. Until the introduction of auto-enrolment the onus was on the employee to join the company workplace pension scheme, however, under the new system, this happens automatically and the onus is on the employee to opt-out should they wish.

There are minimum contributions associated with an auto-enrolment workplace pension which currently stand at 3% of your salary for your employer’s contribution and a total of 8% of your salary for both your employers and your contribution. Because your contribution comes from your pre-tax salary, this actually comes to less than it might first sound and of course, the government will add a further 20% tax relief.

Anyone over the age of 22 in full-time employment and earning in excess of £10,000 from one job is covered by auto-enrolment. However, this excludes workers who are self-employed or sole directors with no other staff. If you are earning less than the minimum £10,000 you can request to be included in your employer’s auto-enrolment scheme, and your employer can not refuse and must also contribute under the above conditions.

What is salary sacrifice?

Salary sacrifice is where you relinquish a portion of your monthly salary and your employer puts that towards your pension instead. This is worth consideration as it comes out of your pre-tax earnings which means you pay less National Insurance. Depending on your tax bracket this can have several benefits:

Basic-rate taxpayer

Salary sacrifice will mean you can avoid 20% income tax on the amount you sacrifice as well as 12% National Insurance contributions. Using salary sacrifice, you can add £100 to your pension pot for every £68 you sacrifice from your salary.

Higher-rate taxpayer

Whether you are on 40% or 45% income tax, salary sacrifice can help you avoid having to claim back your tax relief at the end of the financial year. You can also avoid the 2% National Insurance deduction on your contribution. This means in order to put £100 into your pension pot, you only need to sacrifice £58 from your pay packet.

How to start a personal pension

For anyone who does not have a workplace pension, and even for those who do have a workplace pension but would like to save extra in a way that gives them a greater deal of control, a personal pension is a great option.

Remember that your personal pension will need to be invested in order to help it grow towards providing for your future. If you are an experienced investor then you will no doubt know your way around the stock market and already have a fair idea of how you would like to invest your pension funds. In this instance there are a number of personal pension providers who will allow you to pick and choose your own investments.

For people who have little or no experience with investing, there are other options that can support you through the process and you may want to consider selecting a provider that will match you with a ready-made fund that is expertly managed in order to maximise your gains, whilst remaining within your risk profile.

Of course with both these options come associated costs which you will need to take into consideration before you choose your provider. The good news is that there is plenty of competition between providers, meaning you can shop around to find the best pension provider for you.

Once you have chosen your personal pension provider, setting up your pension can be done in mere moments with your personal details and national insurance number.

What is the best personal pension provider?

With a personal pension you can either open a brand new personal pension, or you can consolidate your existing pensions into one easy to manage pot.

Best personal pension providers for experienced investors

Provider Account Fee Share Dealing Fractional Shares? FX Rate Transfer out fee
Freetrade £9.99 pcm FREE Yes Spot rate +0.45% FREE
Hargreaves Lansdown 0.45% £11.95 No Spot rate + 1% FREE
Interactive Investor £19.99 pcm £7.99 1 free trade pcm No Spot rate + 1.5% FREE
AJ Bell Youinvest 0.25% £9.95 No Spot rate + 1% £9.95

Best personal pension providers for ready made funds

Provider Platform Fee Fund Cost Transfer Out
Pension Bee 0.5% – 0.95% 0.03% transaction cost FREE
Penfold 0.75% FREE FREE
Moneybox 0.45% 0.13% – 0.25% fund provider cost FREE
Moneyfarm 0.75% 0.2% fund fee FREE

How do I start a pension if I am self-employed?

Being self-employed is a pension red flag as research has revealed that this group of workers are the least likely to be saving into a pension. If this is you, then the important thing to remember is that it’s never too late to start saving for your retirement, and a small pension pot, is better than none at all.

One of the major issues with being self employed is the lack of spare time, and therefore you might want to consider a personal pension provider that is quick and easy to set up, and can manage your investments for you with minimal intervention on your part.

Penfold

Penfold

Penfold have set themselves up as a pension provider that is specifically developed with self-employed people in mind. They have made their product as straightforward and easy to set up as possible so as to minimise the effect on your time. They also provide their savers with complete flexibility, with the ability to pause, top up, or change your payments at any time in line with your changing circumstances. All this alongside a competitive fee structure made them an excellent option for self-employed people looking to set up their first pension.

Pensionbee

Pensionbee

Pensionbee is another provider which is expertly suited to self-employed people, with the added benefit that they will help you find and consolidate any existing work pensions that may be languishing in multiple small funds. Much like Penfold, Pensionbee are remarkably quick and easy to set up and you can be up and running in moments.

Both of these options can be effectively managed from your mobile using their innovative app. You simply need to pick the investment plan and let the provider do the rest for you.

How to start paying into a pension

If you are being automatically enrolled in a workplace pension, then there are minimum contributions levels to be aware of. Whilst this may change in the future, it currently stands at 8% of your earnings, with at least 3% of this amount being paid by your employer. This is essentially like having a pay rise, as the 3% your employer contributes (some employers will offer more as a generous employment package) is in addition to your salary.

Usually your employer will make all the arrangements on your behalf and take your contribution automatically out of your salary.

For private pensions the process is all up to you. There are personal pension providers that can link to your bank account so your monthly contributions automatically come out of your account. How much you contribute and how often is entirely up to you, and many providers also offer complete flexibility with the option to pause, or stop contributions at any time.

How to choose your pension provider

There is so much choice when it comes to pension providers, all of whom are competing for your business. So how do you choose the best possible provider for your circumstances? Here are some tips on how to make your selection.

Cost

With all providers there are associated costs, and these can soon start to eat away at your gains if you don’t pick the right pricing structure for your pot. Generally speaking, if you are just starting your personal pension, with a small amount of money, then you will probably pay less in costs with a percentage fee rather than a fixed fee. Larger pots can start to cost a lot in fees with a percentage structure and may be more suited to a flat monthly fee. Also look for providers who reduce the percentage fee as your pension pot grows, or alternatively make plans to switch providers once your pot has reached a certain amount.

The account fee is not the only cost to be aware of, and these ‘hidden costs’ can soon start to add up. Potentially one of the most significant costs to you is the price for buying and selling shares. This can range from zero commission trading to £11.95 per trade so is certainly a consideration. Of course the impact to you personally will depend on how many times per month you are likely to trade.

You should also make sure you are aware of any fees for transferring funds in and out of your personal pension as well as the FX rate if you intend to buy shares outside of the UK.

Minimum Contributions

Ensure you can afford the minimum contributions as well as the starting amount. This can be as little as £1 for some providers whilst other providers will require substantial amounts to get you started.

Investment Options

Each person’s requirements for investment options will differ depending on their investment style and expertise. Complete novice investors would be better off selecting a platform with a good range of managed funds to pick from so someone else can do all the hard work for you. However, seasoned investors will want a good range of stocks, shares, ETFs and funds with which to create a diversified portfolio. This group will also need to be aware of the cost of buying and selling shares.

Is it ever too late to start a pension?

It is definitely never too late to start a pension, however, the longer you leave it, the more you will need to contribute in order to provide for your retirement. Starting a pension in your 30’s will still give you around three decades to build a pension pot to support the state pension you will be due at retirement. Should you leave starting your pension till you are in your 40’s, then it is likely that any early retirement will be off the cards, however, you will still be able to use investments and the art of compounding to build a substantial amount.

Having debts and mortgages paid off before you retire will also contribute to a better lifestyle in retirement by reducing your outgoings. There are a few pension calculators available online which can help you ascertain what your contributions will add up to when the time comes to retire.

Why start your pension early?

The reason we are all encouraged to start saving into our pension as soon as possible is because of the miracle of compounding. Referred to by Albert Einstein as the eighth wonder of the world, compounding in this instance refers to the effects of interest on the growth of your wealth. This is because everytime you earn interest on your pension pot, the interest earned, will also start to earn interest.

As an example, a pension pot worth £100, earning a return of 5% will be worth £105 after a year. The following year the entire pot of £105, earning a return of 5% will be worth £110.25. Using these calculations, this amount will be worth £163 after 10 years, without you adding a single contribution. After 30 years, this initial investment of £100 will be worth £446.77, earning a total of £346.77 in interest alone.

Now let’s say you add in a monthly contribution of £100 for that same period of 30 years. At the end of the term your pension pot will be worth £83,672.64 and in that time period you would have earned £47,572.64 in interest.

This is why everyone should start saving as soon as possible in order to maximise on the amount of interest they earn. These calculations do not take inflation into account, or any additional contributions you may be able to make.

Are there alternatives to starting a pension?

There are several alternatives to saving into a pension, perhaps the most plausible one being the Lifetime ISA which is designed to help people save for their first home, or retirement.

A Lifetime ISA is a financial product available to those between ages 18 and 40. Like other ISAs, it offers a tax-wrapper for your savings and earnings. You are allowed to save up to £4,000 per year between ages 18 and 50. If you max out your contributions each year, you will earn a £1,000 annual bonus from the UK government.

These products are available as a cash ISA and a stocks and shares ISA, which have different bonuses and rules.

Like other ISAs, you can withdraw your money at any time. However, unlike other ISAs, you will pay a penalty if you withdraw before your 60th birthday. The penalty is 25%, which means you’ll get back all the money you put in, but you’ll automatically lose every government bonus. The only exception is for those using Lifetime ISAs to save for your first mortgage deposit. In these cases, there’s no penalty for withdrawing before age 60.

The penalty is steep because like a pension, a Lifetime ISA is designed to serve as retirement income rather than as a simple savings account. You can’t use it to avail of the tax benefits or government contributions as a matter of convenience.

When is a Lifetime ISA a better option than a pension?

A Lifetime ISA can be a better option than a personal pension if you are still many years away from retirement and there’s a chance you may need to access the money early as access is possible, even if you lose the benefit.

Lifetime ISAs also suit you if you have a personal pension and you make the maximum contribution each year. The Lifetime ISA offers a new tax-wrapper for your money.

When is a personal pension a better option than a Lifetime ISA?

Personal pensions tend to suit workers who already have a workplace pension or for those who pay in from higher tax brackets.

If you have to choose one over the other, it’s worth noting that personal pensions are more flexible than Lifetime ISAs. You can withdraw at 55 if you want to. You can also make larger contributions after age 50. The most you can contribute to the Lifetime ISA is only £128,000, but you can add £1.03m to your pension over your lifetime.

There are also far more options for using your pension either as income or withdrawing as a lump sum payment when it’s time to retire.

Do I need financial advice to start a pension?

New pensions freedoms mean that we are more in control over our pension pots than ever before. If you are considering taking out a personal pension, then you may be contemplating how necessary a financial advisor is.

A financial advisor will look at your unique circumstances, when you wish to retire, your income and outgoings, any debt and your financial aspirations in order to put a pension in place that can meet your needs. However, there are pension calculators online that will give you a vague idea of the amount you will need to contribute, and as long as you have a rough idea what age you plan to retire, as well as an idea of how much you will need to comfortably retire, then there is no reason why you can’t start a pension on your own steam. There is of course an associated cost with financial advice, although higher earners may benefit more from the services of a financial adviser.

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How to invest your pension savings

There are a multitude of options when it comes to investing your pension savings. If you are saving into a workplace pension, then your employer will most likely be managing your pension on your behalf, however, if you are looking to provide a pension income with a personal pension, then you may be looking for the best investment strategies to maximise your gains and grow your pension pot.

Generally speaking, the further you are away from retirement, the more risk you can assume as you have longer to ride out any volatility in the market. However, as you near retirement age you should start to take a more cautious approach.

Of course, everyone’s level of skill and experience investing in the stock market is different, and therefore you will need to take this into account when deciding how to invest your pension. Unless you have hours to spend meticulously studying the marketplace in order to pick your stocks and create a fully diversified portfolio, you might want to consider selecting a ready made fund. Pension providers such as PensionBee and Penfold exclusively provide their pension savers with ready made funds, in order to ensure the process is as simple and easy to manage as possible. These ready made funds can be matched to your appetite for risk and a team of experts will make appropriate changes to ensure your fund remains in line with changes to the marketplace.

How to manage my pension

Setting up a pension and saving into it is a fairly straightforward procedure and there are plenty of providers now who can manage the entire process for you, linking to your bank account and ensuring regular monthly contributions so you need barely think about it. However, there are considerations which you will be responsible for, such as ensuring that the value of your pension remains on track to providing for your future.

The other part of your pension that requires careful consideration is when it comes time to withdraw. There are several options available to you which we have gone into in more detail below.

How to use your pension pot

When you reach retirement, you need to decide how you want to use the pension pot you accumulated over the years. In the past, pension distributions almost always took place through set monthly payments, as this catered well to workers’ expectations. It also helped employers, who were able to pay out pensions monthly rather than struggle to come up with a lump sum immediately upon workers’ retirement.

Thankfully, changes that came into effect in April 2015 make using your pension far more flexible than it was in the past. You must still need to reach age 55 before you can touch it (unless you’re in poor health).

Understanding how you might want to use your pension now is important because not all pension providers offer the same options.

Once you have access, you have these options:

  • Leaving your pension sit (known as deferred payment, which will allow it to continue to grow)
  • Withdrawing (optional) and purchasing an annuity with the balance
  • Withdrawing (optional) and choosing pension drawdown
  • Taking small lump sums (tax occurs)
  • Taking the whole lump sum (tax occurs)

A financial advisor can help you decide which of these options best suit your financial needs.

When should you choose an annuity?

An annuity is a retirement income payment sold through insurance companies to provide a regular income during retirement.

You can use your pension pot to purchase an annuity and ensure you have a steady flow of income throughout your retirement years. These can be set up to begin paying immediately (immediate) or at another fixed point (deferred).

There are three basic types of annuities: fixed, variable, and indexed. Your pension provider may offer all or none of these annuities for you, or you may choose to withdraw and seek out your own annuity choice.

The benefits of annuities are simple: it pays out a guaranteed monthly payment for the rest of your life. However, once you buy one and set its terms, you will have a difficult time changing it. And as people live longer and find themselves facing more complicated financial lives, the inflexibility of an annuity can be a hindrance or even be financially devastating if you’re relying solely on the annuity.

Annuities can also be expensive, as you’ll pay fees for service even though you’re no longer growing your pot. There can also be additional fees if you need to withdraw or customise your annuity after the initial terms.

A financial advisor can tell you whether an annuity is the right choice for your pension.

What is pension drawdown?

Pension drawdown is another way to use your pension as a form of regular income throughout your retirement. It differs from annuity because it is far more flexible.

A pension drawdown means your pension remains in the account, and it’s still invested. It gives you the flexibility to continue growing your pension pot even during retirement. You also have more flexible options in regards to what you withdraw and when.

Unlike an annuity, a drawdown is only guaranteed as long as there’s funds available. There’s no guarantee for life. However, if you have the funds available, you can withdraw as much as you need. That means that if you have an emergency or a new investment opportunity arises, you can withdraw as much as you want or need.

In the past, there were two drawdown products. However, if you are starting an account or retiring today, you can only use the pension drawdown option, which removes the limitations on your drawdown.

What are the tax implications of retirement?

Remember that while saving is tax free, some of the money becomes taxable once you begin to receive your pension.

The first 25% of money taken from your pot is tax-free and never counts as your standard Personal Allowance, which is currently £12,500.

Your total tax bill will depend on your income for the year, including your pension and any other forms of retirement income.

The current tax rules for retirement products include:

  • No tax on untouched pension pots
  • 25% tax-free on cash-outs for each cash out – 75% taxable on each cash out
  • 25% tax-free on whole pot withdrawals -75% taxable on whole pot withdrawals
  • 25% tax-free before buying annuity – tax on income from the annuity

If you mix your withdrawal options, then the tax due depends on what you mix.

Will my beneficiaries pay inheritance tax on my pension?

Most pension providers will allow you to name a beneficiary who will receive your pension in the event of your death. The good news is that pension pots are not subject to inheritance tax and can actually be used to reduce your inheritance tax bill. If you die before the age of 75, your beneficiary can withdraw the money without paying any inheritance tax. However, if you die after the age of 75, your beneficiary will be subjected to inheritance tax on any amount that they withdraw from your pension pot at the marginal rate.

As pension pots fall outside of inheritance tax before you reach the age of 75, this can be used to reduce your inheritance tax bill, however, you should avoid paying in anything over the pension allowance.

How to plan your retirement income

You should start to plan your retirement income around two years before you plan to retire. Hopefully by then you have moved any of your pension investments into low risk investments. Some providers will carry this out on your behalf but it is up to you to check this has taken place. The first step is to find out exactly how much you will have in retirement from your state pension, work pension, and any private pensions. This should be combined with any savings and investments you might have which may also be available for your retirement.

Once you have your total amount you can decide when it would be appropriate to retire and start drawing on your pension. You must be at least 55 years of age although this can be brought forward if you are suffering from poor health. If your pension total is less than you were hoping then it might be worth delaying your retirement in order to boost the value of your pension pot.

The next step would be to clear any debts that might still be outstanding before you retire. This includes personal loans, mortgages and credit card debt. You could use your pension tax-free lump sum to clear these debts unless you belong to a defined benefit pension scheme, in which case this can work out as an expensive option and you might be better to repay debts out of your pension income.

You will also need to budget for your retirement as your outgoings and income are likely to be different. There are various budget planners available online that can help you identify changes in your spending.

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