Pensions Explained
The way pensions work is simple. Through your working life you contribute money into a pension pot – your employers and the government may also add contributions. Your money is then invested with the aim of growing it over time, boosted with significant tax benefits.
While with any investment the value can go up or down, by the time you retire you can expect to have grown a worthwhile nest egg. After 55, you can access your money as a lump sum or regular income.
With locked in savings, you have peace of mind that whatever life throws up, your money will be waiting for you when you retire.
In the UK, when you reach State Pension Age you can get a regular payment from the government known as the Basic State Pension. The most you can currently get is £203.85 per week.
While a state pension is a solid foundation, for many people this won’t be enough to afford the things they would like in retirement. That’s why your own long-term savings are an important part of the picture.
Putting money into a pension while you’re working is a very effective way to build a nest egg and give you a better income at retirement.
Pensions are one of the most tax-efficient ways of saving for retirement. If you work in the UK, the government will give you tax relief on your savings, which will be added to your pension pot. And you may have the option to take a tax-free lump sum when you retire.
Access free impartial retirement advice at Pension Wise, the UK government’s guidance service.
When you contribute to your pension fund, the government will add 25% of the contribution as basic rate tax relief. For example, you contribute £800, the government adds £200 giving you £1000. Higher Rate taxpayers can claim back a further £200 via their tax return, making the actual cost of the £1000 in your pension pot only £600! Further tax relief can be claimed by Additional Rate taxpayers.
Money in your pension pot can grow faster because the growth is not subject to any personal taxes. All interest on cash deposits is tax free and there is no tax payable on gains in property funds. Also, if you die before taking any money from your fund, then the money in your fund will normally be paid, free of Inheritance Tax, to the persons you have nominated.
At any time after the age of 55 you can begin drawing money from your fund. You have the option when you first start taking money out to take a tax free lump sum of up to 25% of your fund value; the balance of the fund can then be used to provide a taxable income in your retirement.
Alternatively, you may decide to take a series of lump sums from your pot; if you do this then 25% of each lump sum will be tax free, with the other 75% taxed as income.
For many people it is very reassuring to know that however their circumstances change, the money they’ve saved in their pension pot will be there when they retire and they won’t have to rely on the State Pension alone. The money paid into a pension is invested with the aim of making it grow so that it’s worth more when you retire. Once you reach retirement age the money is yours to use how you decide.
Under Automatic Enrolment almost all UK employees have the opportunity to save into a workplace pension scheme and get additional contributions from their employer and the government. As an employer you may have obligations to enrol some or all of your workers into a pension scheme and make contributions into their pension pot
As with all pension schemes, there’s a lot of information which can be confusing. Whether you are employed, self-employed or not working, you can start saving into a pension scheme for your retirement.
To help simplify things, we’ve broken it down into three steps:
If you’re ready to start saving, apply online today. Or, if you have questions or would like to chat to our expert team, contact us online, call 0151 448 5423 or email [email protected]
Information for individualsInformation for EmployersIf you have questions or would like to chat to our expert team, contact us online, call 0151 448 5423 or email [email protected]. If you’re self-employed or not working, you can apply online.
