Pensions explained

When you’re looking at pensions, you’ll find there are a number of different types available. What they all have in common is that they can help provide you with a way of getting an income when you retire.

These are some of the important things you need to consider when you’re thinking about pensions:

Main features and benefits< Back to summary

You get tax relief on some of your contributions

Under current tax rules you effectively pay just £80 for every £100 investment, if you're a basic rate tax payer. If you’re a higher rate taxpayer, you can claim any higher rate tax relief you are entitled to through your self-assessment returns.

Your employer may contribute too

Many employers contribute into pension schemes on behalf of employees. Check with your employer to see if this is something they currently offer.

You can withdraw funds while leaving some money invested

From the age of 55, you can normally start taking money out of a defined contribution pension. You don’t have to take anything until you want to, and you don’t have to take it all at once.

Read more at How do I take money from my pension fund?.

You can take some of your money tax free

From age 55 you can usually take up to 25% of your defined contribution pension pot as tax-free cash. The other 75% will be taxed at your marginal rate. It may also be possible to take tax free cash from a defined benefit scheme but in most cases this will reduce the level of income you can receive.

Of course, how much tax you’ll pay depends on your personal circumstances – and tax rules may change in the future.

What are the different types of pension?< Back to summary

Workplace pensions

These are arranged through your employer. By 2018 every employer must automatically enrol staff members into a company pension scheme if they; are aged over 22, earn more than £10,000 a year and work in the UK. With most schemes, both you and your employer pay in. Your own contributions will normally be deducted from your salary. Different types of schemes are available:

  • defined contribution - most workplace pensions are now this type. Money paid in by you or your employer is invested. Eventually you take cash from your pot, use it to buy an income, or both.
  • defined benefit - The amount you get back depends on your salary when you retire and how long you have worked for your employer.

Individual pensions

These include personal pensions, stakeholder pensions and self invested personal pensions (SIPP's). You can pay in regularly and/or make one-off payments. What you get back is based on the value of the pension pot you build up, which depends on a number of factors, including the performance of investments made within the pensions. Employers can also contribute to your personal pension.

Please remember that for defined contribution schemes and individual pensions, the value of your investments could go down as well as up, so you may get back less than what was paid in.

Different pension providers will offer different fund choices and may have different charging structures. so it's important to shop around before selecting one to invest in.

State Pension

If you’re paying National Insurance contributions and qualify, you should be entitled to a State Pension when you reach State Pension age. On its own, it's unlikely to provide a comfortable retirement, but can be an important part of your overall retirement income.

How do I contribute to a pension? < Back to summary

  • You can make regular or one-off contributions to individual pensions and most workplace pensions – contact your provider to see how they will take payment.
  • You may be able to make contributions direct from your salary. Your employer may be able to make contributions too. Speak to your employer to see what your options are.

How much tax relief can I get? < Back to summary

  • You will receive tax relief on the lower amount of either 100% of your salary, or the first £40,000 you pay into your defined contribution pension in the 2016/17 tax year. This amount may be capped at £10,000 if you have started to take money from your defined contribution pension fund.
  • From 2016/17 individuals with income (including the value of any pension contributions) of over £150,000 and who have an income (excluding pension contributions) in excess of £110,000 will be subject to a tapered annual allowance. The rate of reduction in the annual allowance is £1 for every £2 of income over £150,000, up to a maximum reduction of £30,000.
  • Tax relief on pension contributions is based on the highest rate of tax you pay. The basic rate of 20% is automatically applied. So if you pay 40% or 45% the additional relief will need to be claimed back through a self-assessment tax return.
  • If you don’t have any earnings, or earn less than £3,600 each year, you can get tax relief when paying into your pension up to £3,600 in the 2016/2017 tax year. This means that if you pay £2,880 the government will top it up to £3,600.
  • Remember, tax treatment depends on individual circumstances and may change in the future.

Aviva Pension

Aviva Pension is a self-invested personal pension (SIPP). It allows you to build up a retirement pension pot in a tax efficient way, whilst having access to a wide range of investments that you can manage online.

Please remember the value of your investments could go down as well as up, so you may get back less than what was paid in.

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