Pensions and Retirement Planning FAQs

We’ve put together answers to some of the most frequently asked questions about pension and retirement planning. If yours isn’t here then please get in touch, and we’d be happy to help.

The Retirement Living Standards, based on independent research by Loughborough University, was created to help picture what kind of lifestyle you could have in retirement. It shows what retirement may look like at three different levels – Minimum, Moderate and Comfortable - and what goods and services would cost for each level. This can be found at https://www.retirementlivingstandards.org.uk/

  • A single person will need about £10,200 a year to achieve the minimum living standard,
  • £20,200 a year for moderate, and
  • £33,000 a year for a comfortable lifestyle.
  • For couples it is £15,700, £29,100 and £47,500 respectively.

The minimum lifestyle covers all your basic needs with occasional activities and one basic holiday a year. The moderate lifestyle fairs better providing better financial security and more choice on spending your money, whereas the comfortable living standard allows you to be more spontaneous with your finances and affords the flexibility to go on more holidays, eating out regularly etc. The question is which one do you want enjoy?

  • The simple principle with pensions is to put in as much as you can afford, as early as possible.
  • There's a very rough rule of thumb for what to contribute for a comfortable retirement …
  • Take the age you start your pension and halve it. Then put this % of your pre-tax salary into your pension each year until you retire.
  • For example, starting aged 32 should contribute 16% of their salary for the rest of their working life. Remember that includes both your employer and your contributions.
  • Go to our pension calculator here to see what your pension pot could be worth at your chosen retirement date based on your contributions.

  • It’s a bit like being rewarded for paying into your pension, where the government effectively tops up your pension payments by the amount of tax you would have paid on the income.
  • Tax relief is based on your pension contributions at the highest rate of income tax that you pay, which means that the amount of relief you actually get is based on the % tax band you are in.
  • For example, if you pay tax at the basic rate, and pay £100 per month into a personal pension, then the pension provider will actually receive a further £25 from the government each month, making the total contribution £125 per month.
  • Any UK resident who pays into a pension is eligible, including low earners and even those without any earnings can benefit from some tax relief.
  • Please also refer to the following question about the limits of what you can pay into a pension.

  • No, and also yes!
  • Technically there is no limit to what you pay into your pension, however there are a few rules which effectively restrict what you can pay in without incurring tax charges, so it’s worth ensuring you make the right level of contributions.
  • If used in the right way, a pension can be an extremely tax efficient way of saving over the longer term.
  • The Pension Annual Allowance caps the level of pension contributions that can qualify for tax relief. Currently the standard Annual Allowance is set at the lower of 100% of your earnings or £40,000 for the tax year 2020-21. However, you can also carry forward unused allowance from the previous three years. This Annual Allowance applies in total to all the pension schemes you have (apart from the State Pension).
  • A lower limit of £4,000 may apply if you have already started accessing your pension. This is called the Money Purchase Annual Allowance (MPAA). The annual allowance applies across all of the schemes you belong to, it’s not a ‘per scheme’ limit and includes all of the contributions that you or your employer pay or anyone else who pays on your behalf.
  • If you exceed the annual allowance in a year, you won't receive tax relief on any contributions you paid that exceed the limit and you will be faced with an annual allowance charge.
  • There are other restrictions which are triggered by annual earnings, and there is also a cap on the total amount that you save, called the Lifetime Allowance (LTA), before a tax charge is payable. If you are concerned that these may affect you, then our retirement specialists can help guide you through this complex area.
  • Please also refer to the following question about the Tapered Annual Allowance.

  • In the current tax year (2021/22) anyone with a taxable income over £240,000 will have their pension annual allowance for that tax year restricted. This means that for every £2 of income they have over £240,000, the annual allowance is reduced by £1.
  • Therefore anyone with an income of £312,000 or more has a pension annual allowance of only £4,000 as the reduction is a maximum of £36,000. People with high income caught by the restriction may have to consider reducing the contributions paid by them and/or their employer or an annual allowance charge could apply.
  • The tapered reduction doesn't apply to anyone with 'threshold income' of less than £200,000.
  • Prior to the 2020/21 tax year lower limits applied and for every £2 of adjusted income over £150,000, an individual’s annual allowance was reduced by £1 with the minimum annual allowance being £10,000.

  • Whether you have a defined benefit or defined contribution pension scheme, you can usually start taking drawing your pension from the age of 55.
  • There are also some circumstances when you may be able to take money from your pension even earlier than 55, such as if you’re in poor health or in a profession where your normal retirement age is earlier than normal, for example, the police or fire service. You may also have a protected pension age lower than 55 under the rules of the Scheme.
  • The government has confirmed plans to increase the minimum pension age from 55 to 57 from 2028, alongside planned increases in the State Pension age to 67. From then on, the minimum pension age will remain ten years below State Pension age.

  • There can be some potential benefits of moving your pensions into one overall plan. Although we’d always stress that you should do this with caution, and consider appropriate guidance or advice, to ensure you don’t lose any valuable guarantees or overlook any other key considerations such as costs and protected, tax-free cash benefits, and indeed any other elements specific to your plans and personal circumstances.
  • There is no guarantee that consolidating your plans will work out better, however there are some key reasons you might want to think about….
  • Simplification – having less pension plans can make them much easier to manage, and you’ll find it easier to keep track of what you’ve got.
  • Scale – having one larger plan rather than a few smaller ones can improve your charges, which in turn has the potential to improve your overall outcome.
  • Appropriate – ensuring that you plans are current, invested according to the risk you are willing to take, and aligned to your desired timescale before you might need to use them.
  • As we’ve said already, advice should always be considered, as valuable safeguarded benefits such as guaranteed annuity rates or protected tax free cash may be at risk should you transfer out of an old pension scheme.
  • Watch our pension consolidation video

  • This does depend upon the type of pensions you hold. See our Learn More About Pensions section.
  • The pension landscape changed dramatically on 6 April 2015 and now offers you, if aged 55 and over, significantly greater flexibility when accessing your pension funds.
  • There is no longer a requirement to buy an annuity and the range of choices now available can be bewildering. Great care should be taken, as the decisions you make now could affect your standard of living for the rest of your life.
  • Managing your retirement options can be complicated so download our guide to your retirement options brochure.

  • This will depend on how you choose to take your pension benefits. For example, for those looking for a secure income this will depend on the annuity rates and types of annuity available to you on all or part of your pension funds. For those seeking a more flexible form of income, there is a lot of information about this, mostly from opinion and some from well thought out financial experts who have tried to come up with safe withdrawal rates.
  • A safe withdrawal rate is effectively an amount, in percentage terms, of your pension that you could withdraw during the early years to meet your spending needs but without placing too much stress in your pension value.
  • What is clear however is that these ‘rule of thumb’ calculations are not personal to you and your needs. We are all different, and as such we would recommend you take professional advice from our retirement specialist team to establish and model your specific situation and plans for the future.

  • The Lifetime Allowance (LTA) is the overall limit of pension funds you can accrue during your lifetime, before a Lifetime Allowance tax charge applies. The standard Lifetime Allowance is currently £1,073,100 (2021-2022).
  • When you take certain benefits, and at some other times (such as attaining the age of 75 or on death before 75) the amount of LTA you have used is tested
  • When your benefits, along with any other benefits you have taken, are over the LTA, a 'Lifetime allowance charge' is applied to the value in excess of the LTA.
  • There are a number of different LTA protections available.
  • The lifetime allowance tax rate depends on whether the excess is paid as a lump sum - called a Lifetime allowance excess lump sum and charged at 55% - or if retained to pay pension benefits, charged at 25% (tax is then payable on the income you receive at your marginal rate).

Firstly, it’s always a good idea to make sure your pension provider has up-to-date details of your beneficiaries. If you have more than one pension, let all your providers/schemes know.

The way you take your pension (if in retirement) will affect how you can leave it to your beneficiaries (the people who inherit it) when you die. Most pension options now allow anyone to inherit your pension – they don’t have to be your spouse or civil partner, however, this depends on the type of pension you have and the options you’ve chosen. So, it’s always sensible to check the rules of your pension scheme or annuity for details.

The following information is applicable depending on if you are a member of a defined contribution or a defined benefit scheme ( you could of course be a member of both types of schemes) and also the age at which you were to die, with 75 being a key milestone in respect of the treatment of pension death benefits :

  • A defined contribution pension – if you die and still have money in your pensions, there are a number of options as to how it can be paid out. The tax position depends on how old you are when you die. If you die before the age of 75, anyone who inherits your pension fund won’t pay any tax ( please note though the pension would be tested against the pension lifetime allowance at this point).
  • If you die after the age of 75, anyone who inherits your pension will be taxed on any income received as earnings at their marginal rate of tax, this would be the case whether the pension contract was an annuity, scheme pension or a flexible drawdown arrangement. If your beneficiaries selected to take funds out through a flexible arrangement ( which is not likely to be possible with an annuity or a scheme pension) then they would only be taxed on any income they take, in the tax year in which they take it. There are no pension lifetime allowance tests carried out if you were to die after the age of 75.
  • A defined benefit pension – if you have a defined benefit pension, any monies to be paid to your beneficiaries will be outlined in the scheme’s rules. This can vary from scheme to scheme. You should check with your scheme trustee’s or administrators to help establish what your beneficiaries might be entitled to when you die. Your scheme might pay a dependants pension to :
    • your spouse or civil partner, your children, providing they are under the age of 23 and in full time education, your child(ren), if they’re mentally or physically impaired, anyone who was financially dependant on you when you died, including a partner you weren’t married to or in civil partnership with

The pension they will get will be a percentage of the pension you were receiving ( or would have got if you die before your pension started to be paid). Any income paid to a dependant will be taxed as earnings at their marginal rate of tax, unless the pension payable was very small, it might, in some circumstances, be possible to take it as a lump sum instead.

Pensions and Inheritance Tax – in most cases, currently any pensions you have can be passed outside of your estate and won’t be subject to Inheritance Tax. However, for this to be the case, the pension scheme trustee’s/ administrator would need to have discretion as to who the benefits are paid to.

  • If you cannot work any longer due to sickness, you may be able to take your pension benefits early, even before the age of 55.
  • If you have a personal pension or workplace pension speak to your provider about the rules of your pension – it will depend on their definition of ‘ill health’.
  • If you have a defined benefit pension your scheme will have its own definition of what ill-health (sickness) means.
  • If you're in serious ill-health (you have less than a year to live), you may be able to take the whole of your pension pot as a lump sum. A serious ill-health lump sum paid before you reach the age of 75 will be paid tax-free provided you have available lifetime allowance. If you’re over the age of 75, the lump sum will be taxed at your marginal rate of income tax.

  • If you’ve divorced or dissolved your civil partnership, or if you’re in the process of doing so, you may find you have less to retire on than you expected.
  • When you divorce or dissolve your civil partnership, any workplace or private pensions that you or your partner (husband, wife or civil partner) had should have been taken into account when dividing the assets. In Scotland, only the pension that was built up during marriage or the civil partnership is taken into account.
  • This could severely reduce your potential retirement income so if you are in this situation you might want to start making contributions to a pension or save in other ways.

Pension scams are increasing all the time, with fraudsters using more sophisticated ways to entice people into making mistakes.

They can come in various forms, such as digital media, emails, letters and even press adverts. Things to watch out for are:

  • Out of the blue contacts – cold calls over the phone regarding pension were banned in 2019, so you should not receive these.
  • Being over friendly and offering cash or deals promising high returns.
  • Adverts claiming that the service is completely free of charge – good quality, regulated, trusted advice is not free and should not be confused with guidance, which is information only and will not ask you to transact anything.
  • Contacts where you have no method of contacting them back or verifying them.
  • Situations where you are being pressured or encouraged to do something with your pension quickly – rarely are pension matters a quick thing, and rightly so given their value and importance.
  • Someone claiming that you can access you pension early.

These are a just a few, but a good rule to have is that if it sounds too good to be true, then it probably is!

We’d recommended that if you are unsure, speak to a trusted family member or friend, and visit the FCA’s ScamSmart Website for some excellent tools to help spot scams.

ScamSmart - Avoid investment and pension scams | FCA

If you’re able to transfer out of your defined benefit scheme and this involves cash equivalent transfer value of £30,000 or over, you’ll be required to get regulated financial advice first from an authorised pension transfer specialist who will determine if these benefits remain suitable considering your objectives and financial circumstances or if you would benefit from transferring them to alternative solutions. This is designed to protect you to ensure you have understood all the issues and risks of transferring.

It is well known that the UK population is getting older and generally people are living longer. For example a recent survey by Canada Life, using population size data from the Office of National Statistics, estimated that the over 60’s population will have grown from 16.6 million people in 2020 to 20.9 million by 2035. Therefore retirement planning is becoming more and more important if you want a reasonable standard of living in retirement.

The Retirement Living Standards shows what retirement may look like at three different levels – Minimum, Moderate and Comfortable.

  • A single person will need about £10,200 a year to achieve the minimum living standard,
  • £20,200 a year for moderate, and
  • £33,000 a year for a comfortable lifestyle
  • For couples it is £15,700, £29,100 and £47,500 respectively

A report “The Value of Financial Advice” by Royal London and the International Longevity Centre – UK (ILC) estimated that expert financial advice delivers real value in improving people’s finances. It concluded:

  • Receiving professional financial advice between 2001 and 2006 resulted in a total boost to wealth (in pensions and financial assets) of £47,706 in 2014/16
  • The benefits of financial advice are potentially greater for those we term “just getting by” than for those we consider “affluent”
  • Fostering an ongoing relationship with a financial advisor leads to better financial outcomes

Engaging with a qualified and authorised independent financial adviser can help you better understand your goals and aspirations towards retirement. A good adviser is also there to help support you make sure you keep on track.

Therefore it is imperative that you have the reassurance of a ‘trusted helper’ you can rely upon to guide, support and advise you.

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Managing your wealth throughout your retirement

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