Pensions - Retirement Planning |

Find out the basics about starting an occupational or personal pension. Discover what you need to look out for and how pension savings are tax efficient.

- Introduction to pensions
- Pensions are tax efficient in 3 ways
- Investment choice - how much risk do you want to take?
- Flexibility
- Why you should consider an occupational pension
- Personal pensions
- What to look out for

When planning how to provide for your retirement, there are several ways to put money aside:

  • Savings
  • Investments
  • Personal pension
  • Occupational pension

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  1. Personal and stakeholder pensions benefit from an Income Tax contributions you make (up to certain limits). That means every time you contribute to your pension pot, the taxman pays some tax in as well! Here's how it works:

    Basic Rate Taxpayers

    Your pension provider claims basic rate tax relief back from HM Revenue and Customs. You don't need to do anything.

    So, for every £100 contribution you make, £125 will be added to your pension pot.

    Higher/Additional Rate Taxpayers

    Your pension provider claims basic rate tax relief back from HM Revenue and Customs (HMRC). However, the additional 20% or 25% that you pay is not claimed back automatically.

    • If you're a Higher Rate Taxpayer you just need to contact HMRC to claim the remaining tax relief (which may involve completing a self-assessment tax return).
    • If you're an Additional Rate Taxpayer you will need to declare your pension contributions on your self-assessment tax return and HMRC will reimburse you.

    In both instances this reimbursement comes to you directly, not your pension provider. So, you'd need to either make an additional contribution to your pension as a one-off payment, or if you can afford to, make higher contributions throughout the year.

  2. Investment gains made within your pension are also tax efficient because they are exempt from Capital Gains Tax and Income Tax.

  3. When you come to take your pension, at the age of 55 or later, you have the option to take up to 25% of your pension pot as a tax-free lump sum. While pension contributions and growth aren't taxed, when you come to take an income from your pension, this will be subject to Income Tax in the same way as earned income.

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The best pensions allow you to hold a range of different investments. You can choose pension funds based on how much risk you want to take with your money, and hold a number of different funds to spread your risk further across different types of investment and geographical areas.

Risk is an important part of deciding which funds to invest in within your pension. Generally speaking, there are two main factors that will affect how much risk you wish to take:

  • Your age in relation to when you want to retire
  • Your attitude towards riskier investments

Younger pension investors can usually take on more risk as their investments have longer to turn around if a loss is made early on. It's also the case that investments tend to perform better over longer periods of time. However, past performance is no guide for the future.

You should also consider splitting your contributions among several different funds with varying levels of risk, to minimise the chance of one badly-performing fund wiping a sizeable chunk off your pension.

The closer you are to retirement, the more you'll want to consolidate your pension pot into lower risk investments to protect it from making a loss.

WarningAs with any investment decision, it's important to take independent financial advice if you are in any way unsure of which pension or fund is best for you.

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You can't access the money held in your pension pot until you reach your 55th birthday. You can take it any time after this. That's under current rules - it has already been announced that this will increase to 56 and then to 57 as life expectancies continue to rise.

However, it depends on your situation and character as to whether such a lack of flexibility is a good or bad thing...



Lack of flexibility ensures that you have a savings pot locked up until retirement. Chances are that not being allowed to dip into it will mean that this pot will be bigger than if you were allowed to access the money earlier.

Not being able to access your money until you're 55 means that you can't call on that cash if you need it earlier - for example if you were struggling with your mortgage.

If you're worried about lack of flexibility in a pension it might be wise to look at keeping a pot of other savings, possibly in a cash ISA or equity ISA, that you can call upon if you have to.

WarningBeware of companies that offer to let you release your pension pot tax-free. Read why you should be wary in this guide.


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An occupational pension simply means a pension plan that's offered through your employer. There are two types of occupation pension:

  • Final salary (or defined benefit) scheme
    This is where you contribute to a pension scheme that will pay you a defined monthly income in retirement, based on how long you've been a member of the scheme and your earnings (not on investment performance). With a final salary scheme, there is no need to purchase an annuity at retirement. These schemes are now more uncommon because of the very high costs to employers of running them.
  • Money purchase (or defined contribution) scheme
    This is where you contribute to a pension scheme that will pay you an income in retirement, based on the amount you've paid into the scheme and investment performance over the life of the pension. With a money purchase scheme, you can purchase an annuity or drawdown income to convert your pension into income.

In both instances your employer helps by also making contributions to your pension - meaning you can build up a larger pot than if you were contributing alone. So if you don't join the scheme, you are effectively turning away extra money from your employer. However, the downside is that you are restricted to the pension scheme that your employer has chosen (although you may have a choice of funds if you are part of a money purchase scheme).

Employers now have to automatically enrol you in a pension scheme if you're not already a member, you earn more than £10,000 per year and are between 22 and state pension age.

Occupational pensions don't have to stop if you leave an employer - you can still contribute to a money purchase scheme after you leave. Although your previous employer's contributions will stop, your pension will continue to grow (depending on investment performance and charges), even if you are no longer contributing. You can transfer your pension too, but remember that there may be fees for moving your pot to a new provider.

WarningTransferring occupational scheme benefits is a complex decision and you should get advice from a specialist pensions adviser.

WarningThere's no such thing as a ‘frozen pension’. Even a pension you are no longer contributing to remains invested, and is still subject to charges from the fund and pension provider.

Find out how to track lost pensions in our guide.


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You may want or have to consider a personal pension instead or as well as your employer's pension. It doesn't matter if you're self-employed, a stay-at-home mum or dad, or even a child - anyone can start their own personal pension.

If you are employed, you might like to have a personal pension outside of work (you can have more than one pension provided your overall pension contributions are less than £40,000 per year), so you can decide which company your pension is with and get the most appropriate range of investments for your needs.

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When choosing a personal pension, it’s important to shop around for the best deal. But what should you look out for when making a comparison?

  • Fund choice
    The pension that offers the most choice isn't necessarily the best. Look for the pension that will offer the funds that you want to invest in. Most providers now offer ethical funds, so make sure this option is offered if this is where you wish to invest your pension.

  • Minimum monthly contribution
    Some providers will require you to make minimum monthly or annual investment to your pension or to each fund within your pension. If you don't meet the pension's minimum contribution requirements, you may be charged a penalty fee.

  • Fees and charges
    Many pension plans will charge an annual management fee. If you invest in certain funds, there could be management fees to pay here as well. There will also be a fee if you wish to transfer your pension to another provider. It's worth finding out what these fees are before making an application, and comparing them between providers. Pension firms cannot charge more than 1% of the fund value if you transfer out after age 55 where the pension scheme was in place before 31 March 2017. New schemes cannot charge a fee in these circumstances, but could do before age 55.

  • Past performance
    You might find it helpful to use past investment performance to help decide between providers. However, if you're comparing past performance, make sure it's over a longer period (at least 5 or 10 years) as investments can fluctuate quite a lot in the short term. Always remember that past performance is in no way a guarantee of how successful a firm will be in the future.

WarningIf you are in any way unsure which pension, or fund to invest in, you should seek independent financial advice.


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