Running from the 12 to 16 September, Pension Awareness Week is a campaign run to help individuals in the UK to better understand their pensions.
Pensions have become increasingly complex over the years, with rule changes and the introduction of various pieces of legislation making things even more complicated.
That’s why awareness campaigns like this are so vital, ensuring that you’re armed with the facts about the value of your fund and how it can contribute to your financial future.
So, in the spirit of Pension Awareness Week, read these five important pension facts that you should know about your retirement funds.
1. Your pension funds are invested
The first thing you need to know is that the money you contribute into your pension is invested in the stock market.
This might be managed for you by your pension provider in a workplace and/or private pension, or you may even choose the investments yourself if you have a self-invested personal pension (SIPP).
Regardless of the type of pot you have, your funds will be invested in the stock market in a range of assets. This offers the potential for your money to grow in value, generating returns that could help to fund your lifestyle in retirement.
And, because your pension will typically be invested for many years, any returns your investments generate can benefit from compounding returns – essentially growth on growth – that can further boost the value of your fund.
Your pension is one of the most tax-efficient ways you can invest your money, too.
Any returns will be entirely free from Income Tax, Capital Gains Tax (CGT), and Dividend Tax. Furthermore, you’ll receive tax relief on your contributions at your marginal rate of Income Tax. That means a £100 pension contribution technically only “costs”:
- £80 for a basic-rate taxpayer
- £60 for a higher-rate taxpayer
- £55 for an additional-rate taxpayer.
The potential investment returns alongside these tax-efficient benefits mean your pension can be an integral part of your retirement strategy.
2. There are limits for how much you can save into your pension
As they have such valuable tax advantages, there are some key limits to pension saving that you should be aware of.
Firstly, there’s a limit for how much you can contribute into your pot each tax year without incurring a tax charge. This is called the “Annual Allowance”, and stands at £40,000 in the 2022/23 tax year.
You can carry forward unused Annual Allowance from up to the previous three tax years. That means you could still make use of any leftover allowance you have from the 2019/20 tax year if you have already used your entire amount this year.
Meanwhile, there’s also a Lifetime Allowance (LTA), standing at £1,073,100 in 2022/23. This threshold counts across all your pension pots for your lifetime.
If you exceed this limit, you’ll face an additional tax charge when you come to draw funds over the LTA. Typically, this will be a charge of:
- 55% if you draw your funds as a lump sum
- 25% if you draw your funds as income. This will be on top of your marginal rate of Income Tax.
Make sure you speak to us if you’re concerned about exceeding either the Annual Allowance or the LTA. We will help you find strategies that could reduce how much you’ll owe in tax.
3. You can pause your contributions – but this may negatively affect your financial future
Of course, you don’t have to pay into your pension – indeed, you’re free to pause or even entirely stop your contributions whenever you’d like.
In the current cost of living crisis, pension contributions might seem like a worthwhile area to cut back on to save some money.
However, many projections show that this can have a detrimental effect on your future wealth. According to figures published by Standard Life, even taking just a year’s break from paying into your pension could mean you’d have £13,000 less in retirement if you’d started contributing at age 22.
So, while you do have the option to pause your contributions, it may cost you in the future. Consider this carefully before you decide to do so.
4. You can hold multiple pensions, or consolidate them under one scheme
Whether it’s because you change jobs and are enrolled in two different schemes, or you simply decided to open a private pension alongside your workplace one, you can hold multiple pensions.
It’s worth noting that regardless of how many pensions you have, all your pots are subject to the various pension allowances and cumulatively count towards them.
You can also choose to consolidate your pensions under a single scheme if you have multiple pots. This can make your fund easier to manage and reduces the chance that you’ll lose track of one in future.
There are various pros and cons of consolidating your pensions, so speak to us if you’d like to find out whether this is an appropriate option for you.
5. You can access your pension from age 55 – rising to 57 in 2028
An oft-stated drawback of contributing to a pension is that once your money is in it, it’s locked away until you retire.
This isn’t quite accurate. In fact, thanks to the Pension Freedoms legislation introduced in 2015, you can now access your pension from age 55 – although this will rise to 57 in 2028.
Even better, you can access the first 25% of your pension as a tax-free lump sum. That means you can start to use your funds to reach your financial goals earlier than you may have thought.
Work with us
If you have any questions about your pension or retirement plan, please do get in touch with us today at Cordiner Wealth.
Email firstname.lastname@example.org or call 0113 262 1242 to speak to an experienced adviser.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. 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.