Pensions Explained

Getting a private pension these days is often a simple case of picking the right provider or joining the one your work provides.

What is a pension?

A pension is a tax-efficient way to save for your retirement.

And who are pensions for?

Pensions are for anyone that is working, earning or plans to retire in the UK. If you’re working and you’re making money, it’s about putting some of that money away. And like I said, it’s a very tax-efficient way to do so.

So how does the tax efficiency work?

If you earn between £12,500 and £50,000 a year, you’re a 20% ‘basic rate’ taxpayer, and you will get that 20% refunded to you on your pension contributions.

If you earn between £50,000 and £150,000, you’re a 40% ‘higher rate’ taxpayer, and you can do a simple tax return and claim the 40% tax back on contributions.

Lastly, if you earn over £150,000 a year, then you can also claim the 45% rate of income tax you would have paid as an ‘additional rate’ taxpayer.

Remember that these rates of tax are not paid on your whole salary, but on the parts of your salary that fall within each threshold!

When should you start paying into a pension, and how much should you contribute?

With pensions the earlier you start, the better. What I hear from a lot of my clients is that their priority is saving for a mortgage and that they’re trying to put all their money towards that. However, the earlier you start paying into a mortgage, the better, because it gives compound interest enough time to work its magic.

I always recommend at least 10% of gross salary goes into a pension, but that doesn’t all have to come from you, because your employer is legally required to put in at least 3% as well. So 10% is a good place to start, and if your employer offers a contribution match, then do consider that as well.

If a 10% contribution is too much, then start small. It is perfectly fine to start with small amounts, say £50 a month, and then build. I have clients that have begun at £50 a month, and then in six months they increase that to £75, and then to £100 in another six months. Increasing your contributions over time is a good idea because then you get into the habit of it and you’re less likely to notice it.

Are there any limits or allowances?

The annual allowance for a pension is 40,000 a year. The current lifetime allowance for a pension is £1,073,100. If you can get there, definitely give me a call!

So what happens when you reach retirement? How do you draw down on the money?

Once you get to retirement age, you can withdraw up to 25% of the money as a tax-free lump sum, and you can buy an annuity using the rest. An annuity is an insurance product that pays you an income for life. You can do this from age 55.

As an example, let’s say you had a retirement pot of £100,000, you’d get £25,000 as a tax-free lump sum, and then you’d pay £75,000 to an insurance company. They would, in turn, say that for your £75,000, they would pay you an income of £5,000 a year for the rest of your life.

You can also do what’s called ‘drawdown’, which is where you withdraw and use the money as you wish. The UK government brought in this option in 2015 under a regulation called ‘Pension Freedoms’. If you choose to go down the drawdown route, any amount withdrawn over the 25% lump sum will be taxed as income.

Wait – your workplace pension different to the State Pension?

Yes. When you see National Insurance (NI) contributions come out of your monthly payslip, that money is used towards public services like the NHS, but it also goes towards your State Pension, formally known as the ‘New State Pension’. You need to have 35 years worth of contributions to qualify for the full State Pension, and a minimum of 10 years to get anything at all.

The State Pension age continues to go up. It’s currently 66 years and scheduled to rise to 67 between 2026 and 2028. By the time people my age come to claim it, it could easily be as high as 70 years. The GOV.UK website has an online calculator you can use to work out what your State Pension age is likely to be.

What you don’t want is to be solely reliant on when you can receive your State Pension before you can retire, as this might force you to have to continue working even when you want to stop.

You can access a personal pension, or a workplace pension (i.e. a personal pension set up for you on behalf of your work) at age 55. But again, you can expect the workplace pension age to go up over time as well.

So, in summary, you can access your workplace pension a lot sooner than the State Pension, and you also have more flexibility in terms of where the money is invested as well.

Are there any circumstances under which you can take your pension earlier than the age of 55?

If you work in an industry where you generally retire younger, there will be specific pensions which allow you to take your pension earlier. Footballers are a great example of this. Also, if you are of ill health and are medically diagnosed as having a short period to live, then you can take your pension early. Other than that, there’s no way.

What happens if I die before I take my pension?

If you die before age 75, then your pension goes to your family members, or nominated beneficiaries tax-free. If you die after the age of 75, then it goes to your nominated beneficiaries, but at their highest rate of tax.


What a lot of my clients do is open up pension accounts for their grandchildren (yes you can open a Junior Pension!) and contribute to those. This sets them up nicely. This can be a great way to reduce inheritance tax, as the money in your pension is deemed as being outside of your estate.

Should someone pay into a pension or into a Lifetime ISA, which is also marketed as a retirement product?

I prefer a personal or workplace pension to the Lifetime ISA as a way to save for retirement due to the tax relief you receive. Additionally, you can access money from a personal pension much earlier than with the Lifetime ISA (55 years vs 60 years). So I still prefer the traditional pension.

What pension options are there for people who don’t work for an employer and are self-employed?

Pensions are fantastic for self-employed people. If you are self-employed, any money that your business puts into a pension on your behalf is classified as a business expense.

For my business clients, I like to advise that they speak to their accountant before their tax bill is due and work out how much their tax bill is. Money businesses contribute to pensions can receive corporation tax relief at 19% based on current tax rates. For example, a business would save £1,900 on a £10,000 contribution into pension! This would be a great idea, particularly if you were going to pay out the money to the taxman anyway.

Given that when you work for yourself, you forgo the option to receive employer contributions. Because of the tax advantages, a pension can be a wonderful, wonderful thing for the self-employed.

Do you need Pension advice?

Getting a private pension these days is often a simple case of picking the right provider or joining the one your work provides. But pensions can be very complex, especially for those who want to transfer an ample existing pension. The Eman Effect UK can aid you with the tough decisions when considering the following:

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No, you must continue to pay NI as long as you are still working as it is a tax.

You need 35 years NI contributions to get a full state pension.

Benefit crystallisation is when you take out some or all of the money within a pension. An ‘uncrystallised’ pension is one that money hasn’t been taken out of yet.

Yes, you can claim state benefits whilst receiving money from your pensions. However, the amount you will receive (if anything) is dependant on the value of your pension and how much income you receive from your pension.

The full new State Pension is £175.20 per week or £9,110.40 per year. The actual amount you get depends on your National Insurance record. The only reasons the amount can be higher are if: you have over a certain amount of Additional State Pension.

The easy answer is yes, but there is an exception. Everyone has a tax free cash allowance of 25% of their pension pot. Any income/money withdrawn after the 25% is taxable and added to any other income you earn.

If you invest your pension into an annuity, then yes you can opt for a fixed income for life. But most people opt for “drawdown”, and with this option, your pension pot could become £0 over time.

Pensions are taxable. You have a 25% tax-free allowance, and then any money you withdraw after the 25% is potentially subjected to tax.