Three types of pension
Arranged through your employer, workplace pensions will become automatic by 2018 if you’re over 22, work in the UK and earn more than £10,000 a year. Usually, both you and your employer pay in, with your contributions coming out of your salary.
There are two types of workplace pension:
- defined contribution: The money you or your employer pay in is invested. From the age of 55 you can take the money as cash, use it to provide an income, or both.
- defined benefit: The money you get back depends on your salary when you retire, and how long you’ve worked for that employer
Personal pensions, stakeholder pensions and self invested personal pensions (SIPPs) all count as individual pensions. How regularly you pay in is usually up to you, and what you get back largely depends on how well your investments perform. The value of your pension can go down as well as up, and you may get back less than what has been paid in. Others such as your partner or employer may also be able to contribute to your individual pension.
There are many different options for an individual pension, from many different providers.
To get a State Pension, you must first reach State Pension age, usually with at least 10 qualifying years on your National Insurance record. Your State Pension is based on your National Insurance record when you reach State Pension age. While the State Pension probably won’t be enough to support you on its own, it can be a useful addition to your retirement income.
Main features and benefits
Tax relief on contributions
With a pension, you effectively pay £80 for every £100 investment, if you’re a basic rate taxpayer. If you’re a higher rate taxpayer, you may have to claim any higher rate tax relief you are entitled to through your self-assessment returns.
Many employers contribute into pension schemes on behalf of employees. Check with your employer to see if they currently offer this.
Choose whether to withdraw
From the age of 55, you can normally start taking money from your defined contribution pension. It’s up to you – you can take it all at once, only take some and leave the rest invested, or leave it where it is for when you retire.
From the age of 55, 25% of your defined contribution pension will be available tax-free. You’ll be taxed for the other 75% at your marginal rate rate. You may also be able to withdraw money tax free from a defined benefit pension, but usually this reduces the level of income you receive.
How can I pay into a pension?
- For individual and workplace pensions, you can make regular and one-off payments – this will vary depending on both your provider and the type of pension you have opened, so check beforehand that you can pay in the way you want to.
- You can usually make payments through your employer, too. Either contributions will come out of your salary, or your employer will pay into your pension themselves. Speak to your employer to see what they offer.
How much tax relief can I get?
- You’ll 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 2016/2017 tax year. The amount you can pay in may be capped at £10,000 if you’ve started to take money from your defined contribution pension.
- If you’re not earning or earn less than £3,600 each year, you can get tax relief when paying into your pension of up to £3,600 in the 2016/2017 tax year. This means that if you pay in £2,880 the government will top it up to £3,600.
- Individuals with income (including the value of any pension contributions) of over £150,000 or who have an income (excluding pension contributions) above £110,000 will have a reduced 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.
- The tax relief you get depends on the highest rate of tax you pay. The basic rate of 20% will be automatically applied to you. So if you pay 40% or 45% you’ll need to claim back the additional relief through a self-assessment tax return.
Remember, the tax you pay depends on your own circumstances, and rules may change in the future.
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