Finance Matters Insights
Pension Awareness Week: Everything you should understand about your pension
It's Pension Awareness Week, so there's no better time to give you an overview of what you should know.
Your pension could become one of your largest assets. Yet, it is very easy to know what's happening with your current account while having no idea how much you've accumulated for retirement, where the money is invested or what income it may eventually provide.
💷 The pensions available to you
State Pension:
This is a regular payment from the Government once you reach State Pension age.
Currently it's £241.30 a week (~£12,548 a year). The amount you receive will depend on your National Insurance (NI) record and you normally need at least 10 qualifying years to receive any new State Pension. If your NI record began after April 2016, you will usually need 35 qualifying years to receive the full amount.
State pension age is currently 66, increasing to 67. You cannot access it early and it is taxable income.
Workplace Pension:
This is arranged through your employer, with contributions usually coming from both you and the organisation.
If you're between 22 and State Pension age and earn at least £10,000 a year, you are normally enrolled automatically. In most auto-enrolment schemes, the minimum contribution is 8% of qualifying earnings, 3% of which must come from your employer.
There are two types of workplace pensions:
→ Defined contribution: the money you contribute is invested. The amount available at retirement will depend on how much has been paid in, how the investments have performed and the fees charged. Accessible from age 55 (rising to 57 from April 2028). When you access it, you can usually take up to 25% tax-free, subject to a lump sum allowance whilst the remaining withdrawals are classed as taxable income.
→ Defined benefit: Rather than building an investment pot, it promises an income in retirement based on factors such as your salary, how long you belonged to the scheme and its accrual rate. These schemes set their own pension age which is commonly 60 or 65.
Self-Invested Personal Pension (SIPP)
This is a pension you arrange and manage for yourself. It can be particularly useful if you are self-employed or want a pension alongside your workplace pension.
Your contributions are invested, and depending on the provider, you can choose your own investments.
Contributions receive tax relief, meaning £80 can become £100 after basic-rate relief. Similarly to a workplace DC pension, you can normally access a SIPP from age 55, rising to 57 from April 2028, and withdraw up to 25% tax-free.
🏡 Pensions and Inheritance Tax from April 2027
Pensions have traditionally been useful for estate planning because most unused pension funds have generally sat outside someone’s estate for Inheritance Tax purposes.
That is due to change.
From 6 April 2027, most unused pension funds and pension death benefits will be included within the value of an individual’s estate when calculating whether Inheritance Tax (IHT) is due. This does not mean every inherited pension will automatically face a 40% tax charge.
Inheritance Tax is normally charged at 40% on the portion of an estate above the available tax-free allowances. The standard nil-rate band is currently £325,000, with the 40% rate generally applying to the portion of an estate above the available allowances. Additional allowances and exemptions may also apply, depending on the assets involved and who inherits them.
Including unused pension funds within an estate could push more estates above the available tax-free allowances, potentially increasing the amount subject to IHT. This removes a significant estate-planning benefit that pensions have traditionally provided.
📊 The pension gap
Having a pension does not necessarily mean you are saving enough for retirement.
The Pensions Commission estimates that around 15 million people are not saving adequately, while only 4% of wholly self-employed people are contributing to a pension.
Women approaching retirement also hold around half the private pension wealth of men.
The current full State Pension provides approximately £12,548 a year, while the Retirement Living Standards estimate that a single person needs around £13,900 for a minimum retirement lifestyle and £32,700 for a moderate one.
This is why the 8% automatic-enrolment minimum should be viewed as a starting point rather than a guarantee of a comfortable retirement.
📌 What does this mean for you?
Your pension should not be something you contribute to for decades without ever checking.
Understanding what you already have, how much is being contributed, where the money is invested and whether it is likely to support the retirement you want is a crucial part of retirement planning.
For some people, pensions may not form part of their retirement plans for one reason or another. If that applies to you, it is still important to consider what will fund your retirement so that planning for it is not neglected altogether.
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Fisayo Martins
Founder at Finance Matters UK
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