Pensions need-to-knows

Pension need-to-knows
Key points for retirement saving

Looking for a simple way to boost your income? Consider starting a pension. Not only will the government add to your pension fund, but if you’re employed, your employer might also be required to contribute.

What is a pension plan?

1 – A pension plan is a tax-friendly way of saving for your retirement

A pension plan is essentially a straightforward financial product:

It’s a fund that both you and your employer can contribute to, and you receive tax benefits on these contributions. The goal is to accumulate savings for your retirement.

When you retire, you have the option to either withdraw money from your pension fund or trade the accumulated sum for a steady income until death, known as an annuity, by purchasing it from an insurance provider.

Since 2015, people aged 55 and over have had the flexibility to access their pension funds, allowing them to withdraw as much or as little as they want, whenever they choose. However, note that from 6 April 2028, the minimum age to access your pension will increase to 57, which is important to consider in your retirement planning.

It’s crucial to recognize the impact of pension savings on your current income. Essentially, you’re setting aside a portion of your disposable income now in return for a future income boost through your pension. As this will reduce your current take-home pay, it’s important to account for this in your budgeting. Consider using our free Budget Planner tool to assist with this.

2 – Is a pension really worth it?

Tax relief means for every £80 you pay in, the state pays in £20 (and it pays in more if you pay more tax)

One significant advantage of contributing to a pension is the tax benefit. When you make personal contributions to your pension, or if your employer deducts a portion of your salary and contributes it on your behalf, the Government automatically adds an extra 20% as a tax rebate directly into your pension fund.

And if you’re a higher-rate taxpayer you can claim an additional 20%, while top-rate taxpayers can claim an additional 25% (for more information on how to reclaim tax, see HM Revenue & Customs’ webpage).

If you are part of a workplace pension, you may not need to reclaim any tax if your employer simply deducts less tax from your pay packet.

How does the tax relief work?

Receiving 20% tax relief doesn’t equate to getting 20% back of what you contribute. Instead, this relief is based on your gross earnings before tax.

For example, when a basic-rate taxpayer (who pays 20% tax) contributes £80 of their post-tax income into a pension, they would have originally earned £100 before taxes were deducted. The tax relief, therefore, is 20% of that £100, which equals £20. The same principle applies to other tax brackets (and it similarly applies in Scotland, although the tax brackets and rates differ).

Invest £100 in a pension 

Basic rate tax payer:  You pay £80 – Tax relief £20
Higher rate tax payer: You pay £60 – Tax relief £40
Top rate tax payer: You pay £55 – Tax relief £55

3 – How much should I put in a pension?

With auto-enrolment workplace pensions, the minimum contribution rate is set at 8% (this is the combined contribution from both you and your employer). However, if you have the means, it’s advisable to contribute more than this minimum.

The general guidance for pensions is to invest as much as you can, as early as you can. A simple rule of thumb for ensuring a comfortable retirement is as follows:

Take the age at which you begin contributing to a pension, divide it by two, and aim to contribute that percentage of your pre-tax salary to your pension annually until retirement.

For example, if you start your pension at age 32, you should ideally contribute 16% of your salary each year for the remainder of your career. While it’s true that most people don’t achieve this target, the key takeaway is to begin as early as possible with whatever amount you can manage, as this gives your investments more time to grow through compounding.

Use pay rises to increase your contributions

There are a couple of tricks here if your pay increases…

• Make sure you put at least the same proportion away. If you’ve arranged for your employer to deduct a percentage of your salary for pension contributions, these will automatically rise in line with your earnings. However, if you’re contributing a fixed amount each month, such as £100, be sure to adjust this amount whenever you receive a pay increase, so that it continues to represent the same percentage of your income.
• Increase contributions if you can. Many individuals find it challenging to save enough early on to follow the ‘half your age’ guideline. Therefore, begin with whatever amount you can manage, and with each pay increase, allocate 25% of your additional monthly income towards your pension.

For a more precise estimate of how much you’ll need for retirement, consider using the pension calculator. This tool will prompt you to input details such as your desired retirement age, your contributions along with those from your employer, and whether you’d like your pension to be adjusted for inflation.

A word of advice for those carrying debt: If you have outstanding debts, particularly those with high-interest rates, you might want to prioritize paying them off before beginning a pension. Alternatively, you could divide your funds between paying down the debt and contributing to your pension, ensuring you don’t delay getting started.

4 – How much can I put in a pension?

There are stringent restrictions on the amount you can contribute to your pension while still receiving tax relief. Although it’s technically possible to contribute more, doing so without the benefit of tax relief negates the purpose of a pension. It’s important to be mindful of two key limits in this regard:

1) An annual limit. The tax relief you get depends on what you earn each year:

• For earnings up to £3,600, you can contribute £2,880 to your pension annually, and tax relief will increase it to £3,600.
• If you’re a non-taxpayer earning between £3,601 and £12,570, you can contribute the full amount of your annual earnings into your pension. A 20% tax relief will be applied, provided your pension scheme operates on a ‘relief at source’ basis.
• For taxpayers earning up to £260,000, you can contribute either 100% of your earnings or £60,000 (whichever is lower) to your pension and receive full tax relief.
• If you earn more than £260,000, your annual pension contribution limit is reduced by £1 for every £2 of income above £260,000. For instance, if your income is £300,000, you can only receive tax relief on the first £4,000 you contribute annually.

You can also carry forward any unused pension allowance from the past three tax years, when the limit was £40,000 instead of the current £60,000. This means it’s possible to contribute up to £180,000 in some cases. Keep in mind that contributions made by others, like your employer, count towards these limits.

2) The ‘Money purchase annual allowance’ limit. If you’ve begun withdrawing funds from your pension, your annual allowance is now capped at £10,000. This change, which was implemented to prevent you from withdrawing significant amounts only to reinvest them for tax relief, marks an increase from the previous limit of £4,000 set in the Spring 2023 Budget.

Previously, there was a ‘lifetime allowance’ (LTA) of £1,073,100, but this limit was eliminated as of 6 April 2023. Consequently, there is no longer a total cap on the amount you can contribute to your pension throughout your career. Nevertheless, at retirement, you can still access up to 25% of the former lifetime allowance tax-free, which amounts to £268,275, regardless of the total size of your pension fund.

5 – What’s auto-enrolment?

Pensions have long been a standard benefit for employees, especially within large organizations. However, not every employer has provided this perk.

The introduction of auto-enrolment has changed this, mandating that every employer must offer a pension scheme, automatically enroll employees, and make contributions on their behalf.

Starting from 6 April 2019, the required minimum contribution from employers was raised to 3%. With auto-enrolment, the overall contribution needs to be at least 8%. Consequently, if an employer contributes 3%, the employee is responsible for covering the remaining 5%.

It’s crucial to note that pension contributions are calculated based on what are known as ‘qualifying earnings’. For the fiscal year 2024/25, this includes pre-tax earnings ranging from £6,240 to £50,270.

For instance, if your annual salary is £25,000, a minimum of £1,501 will be automatically allocated to your workplace pension. This amount is derived from the formula: (£25,000 – £6,240) x 8%.

Should your salary be £50,270, the contribution totals £3,522, calculated as (£50,270 – £6,240) x 8%. However, even if your earnings exceed £50,270, such as £55,000, the 8% contribution is still only applied to the income between £6,240 and £50,270, keeping the minimum contribution at £3,522.

Participation in auto-enrolment is default, meaning if you do not actively choose to opt out, you will automatically be enrolled.

For a comprehensive understanding of auto-enrolment, refer to our detailed guide that covers all the essential information.

6 – What’s ‘salary sacrifice’?

Contributing to a pension plan provides a tax advantage for all taxpayers. However, if your employer offers it, salary sacrifice is an additional and straightforward way to enhance your benefits.

Salary sacrifice can be applied to various workplace perks, including childcare vouchers and cycle-to-work programs, not just pensions.

This process involves redirecting a portion of your pre-tax salary to fund other benefits, such as pension contributions. Since the money is deducted from your salary before tax, you end up paying less national insurance (NI). Additionally, your employer benefits from reduced employer’s NI contributions, creating a motivating factor for them to support this arrangement.

• Basic rate taxpayers. Since your pension contribution is deducted from your pre-tax salary, you benefit from a reduced income tax rate of 20%. Additionally, you’ll bypass the 8% National Insurance contributions on the sacrificed amount. This means that for every £72 you opt to forgo from your salary, £100 is added to your pension fund.
• Higher or top-rate taxpayers. If you’re taxed at the higher rates of 40% or 45%, salary sacrifice can simplify your tax relief process. This approach means you won’t need to reclaim additional tax relief because your contributions are not taxed initially. Additionally, National Insurance (NI) is not deducted from these contributions. To contribute £100 to your pension, you only need to forgo £58 from your paycheck if you’re a higher-rate taxpayer, as there are no tax or NI deductions. For those in the top tax bracket, the amount you need to sacrifice is just £53.

When considering salary sacrifice, it’s important to remember that this arrangement reduces your salary. This reduction can lead to various consequences, such as potentially disqualifying you from statutory maternity pay.

For the year 2024/25, if your salary sacrifice lowers your earnings below £123 per week, £533 per month, or £6,396 annually, you might be impacted. If this applies to you, carefully evaluate the implications before proceeding with a sacrifice. Additionally, the sacrificed amount must not reduce your salary below the minimum wage.

This reduction could also influence other aspects such as mortgage applications and benefits like jobseeker’s allowance and employment and support allowance.

7 – Should I take my employer’s pension? (Yes… if you don’t, you’re throwing away a pay rise)

If you’re working and aged 22 or older with an annual income of at least £10,000, you’ll be automatically enrolled in a pension plan. Your employer is required to contribute a minimum of 3% of your salary (up to specific limits) into this pension fund.

Think of it as a salary boost—opting out means missing out on this additional contribution from your employer. While it doesn’t directly increase your take-home pay, it’s money being invested in your future.

8 – Should I ‘consolidate’ my pensions?

Pension consolidation involves merging all or a portion of your pension funds into a single account. This approach offers several benefits, but it’s important to recognize that it might not be suitable for everyone.

Advantages include:

• You can save on fees if you transfer to a cheaper pot.
• There’s less admin and paperwork for you to keep track of.
• You can easily see your pension amount in one place so you know how much is in your pot.
• Newer pensions are often easier to access at retirement.

But there could be some downsides too:

• Your existing pensions may have investments more suited to your attitude to risk.
• Your pensions may have exit penalties so you’ll have to pay to transfer them.
• You could be giving up valuable benefits such as guaranteed payouts.

Unless you have a deep understanding of finances, you might not be fully aware of the details of your pension scheme or whether consolidating your funds into a single pot is the best choice. Therefore, it’s wise to seek guidance or advice before making any decisions, as mistakes can be costly. For comprehensive assistance in locating a financial adviser, refer to our financial advice guide.

9 – Aren’t pensions a load of rubbish?

Disregard any criticisms you might have encountered regarding pensions. Many of these criticisms arise from a basic misunderstanding of what a pension plan actually is. Essentially, a pension plan is a tax-advantaged vehicle designed to help you save for retirement. It serves as a tax-efficient savings tool and is not inherently risky. The risk associated with it depends on the investment choices you make within the plan.

10 – What are the different types of pension?

Pensions come in all shapes and sizes. The first distinction is whether the pension is a final salary or a money purchase pension.

Final salary

These pension plans, often referred to as defined benefit schemes or, in some cases, Career Average Revalued Earnings schemes, are primarily financed by employers, though employees might also contribute. Under these schemes, you receive an annual income based on a percentage of your salary at retirement or upon leaving the company.

The percentage you receive is determined by the length of your employment with the company. Typically, your employer sets an ‘accrual rate’ as a fraction of your final salary.

For example, if the accrual rate is 1/60th, you would earn 1/60th of your final salary for each year of service with the company. Therefore, after working for 30 years, you would receive 30/60ths, which equates to half of your final salary at retirement.

Money purchase pensions

In money purchase pensions, or defined contribution schemes, the funds you contribute are invested, and the amount you have upon retirement depends on the performance of these investments.

Upon reaching retirement, you have the option to either take a cash withdrawal from your plan or convert its value into an annuity, which provides a steady income for life.

This type of pension is common in workplace pensions and is the standard for all personal pension plans.

Pension plans can also be categorised as:

• Workplace pension schemes. In this system, you and/or your employer contribute a set amount of money each month. This money is then invested by a pension provider until you retire. Workplace pensions come in three varieties: trust-based, contract-based, and statutory.
• Trust-based pensions. A board of trustees oversees the management of investments on your behalf. Both you and potentially your employer contribute to this fund, which is then invested. The trust fund operates independently from the company, maintaining a clear separation. Additionally, it provides the flexibility to extend benefits to your partner or other dependents.
• Group personal pensions. This kind of pension plan involves a contract between you and an external insurance company. The insurance company isn’t obligated to prioritize your best interests. Although your employer selects the provider, these plans typically give you various investment options to choose from.
• Stakeholder pensions. These operate in a manner akin to workplace pensions, offering the benefit of low and adaptable minimum contributions, capped fees, and a predetermined investment option. This means you won’t need to make decisions about where to allocate your funds.
• Self-invested personal pensions (SIPPs). These are self-directed pensions, giving you the freedom to select your own investments. Investors willing to put in the effort can manage a SIPP affordably, provided they choose the right provider.

What about the state pension?

You become eligible for this once you reach the state pension age, which is presently 66. For the 2024/25 period, the traditional basic state pension has increased to £169.50 per week. However, those who retire after April 2016 receive a state pension that has risen to £221.20 per week. Your entitlement to the state pension accumulates through paying national insurance (NI) contributions over your working years (refer to the State Pensions Guide) or by receiving NI credits.

The following table illustrates the variations between the different types of pensions:

11 – Should I go for a stakeholder pension if I just want something simple?

Although there aren’t many around these days, stakeholder pensions are designed to be simple, entry-level products, with a few key features:

• Low and flexible minimum contributions. You can usually pay in from as little as £15 to £20 per month.
• Capped charges. For the initial 10 years, stakeholder pensions are restricted to a maximum management fee of 1.5% of your total pension pot. After this period, the fee can’t exceed 1%. However, it’s important to remember that while many Self-Invested Personal Pensions (SIPPs) may offer lower fees, they do not have a fee cap.
• Simple investment choices. They typically focus on a more limited selection of funds and often provide a default investment option. This means that, unlike a SIPP, you won’t have to research and actively choose funds on your own.

12 – Who’s holding my money when I save in to a pension?

In many workplace pension plans, your employer selects a third-party pension provider like Aviva or Standard Life. Typically, a default fund is chosen either directly by your employer or on their behalf, and if you don’t take any action, your contributions will automatically be directed into this fund.

However, most pension schemes offer the option to select your own investments. If you choose this route, it’s advisable to ensure that a) you are comfortable managing your investments, b) you have carefully researched the available funds and chosen ones that align with your risk tolerance, and c) you have the time to periodically review their performance.

When setting up a personal pension, it will also be overseen by a pension firm, but you will be responsible for making the investment choices, unless you choose a robo-SIPP. For additional details, check out our guide on the most affordable SIPPs.

13 – How do I get a pension?

With the introduction of new regulations, a significant number of individuals will find themselves automatically enrolled in a company pension scheme, which means all they need to do is accept the option provided by their employer. To receive any contributions from your employer, you typically need to be enrolled in their pension plan.

If you decide to select your own pension plan, you’ll need to carefully research the market to find the best option. Many opt for a Self-Invested Personal Pension (SIPP); refer to our Cheapest SIPPs guide for assistance on how to choose.

However, if you’re not well-versed in financial matters, consulting an independent financial adviser (IFA) could be beneficial due to the variety of pension charges to consider. Check out our Financial Advisers guide to learn how to choose an IFA and understand the costs associated with obtaining financial advice.

14 – Self-employed and don’t get a workplace pension? It’s time to do your homework

As a self-employed individual, you won’t have access to a workplace pension scheme, but planning for retirement remains crucial. Fortunately, you can still benefit from tax advantages similar to those available to employed individuals. This means you receive 20% tax relief on your pension contributions, and if you’re in a higher or additional tax bracket, you can claim further tax relief through self-assessment.

You’ll need to decide on the best approach to save for your retirement. Your choices include…

• SIPPs (self-invested personal pension plans). These are self-directed pensions, which enable you to select your investments with great precision. If you have the expertise, SIPPs can offer low fees and significant flexibility. Refer to our Affordable SIPPs guide to determine if they’re suitable for you.
• Standard and stakeholder pensions. Here, you have a more straightforward range of options, and with a stakeholder pension, the fees are limited. For additional details on what a stakeholder pension is and how to begin, check out the relevant information.
• Robo-investing pensions. Here, you deposit your funds, and an algorithm selects the investment options on your behalf. This approach is straightforward and user-friendly, though it offers fewer choices. Typically, these services are available through SIPPs, so check out Robo-investing for pension plans.
• Lifetime ISA (LISA). If you’re under 40, you have the opportunity to open a Lifetime ISA to save for your first property or retirement. The Government contributes a 25% bonus to your savings, equating to £1 for every £4 you deposit. You can choose to have a LISA in addition to, or as an alternative to, other savings options.

For individuals with employment where employer contributions are matched, LISAs might not be as beneficial. However, for self-employed individuals who pay basic rate tax, LISAs could be advantageous. They are less likely to be beneficial if you are subject to higher- or additional-rate tax. See Lifetime ISAs vs pensions.

Confused? Here’s where to get help

Initiating a SIPP or stakeholder pension typically means you won’t receive personalized advice, which might not be an issue for everyone.

However, if you find yourself puzzled, uncertain, or dealing with complicated situations, it could be worth investing a few hundred pounds at the outset to avoid potentially losing thousands over your lifetime. Independent financial advisers (IFAs) can provide valuable assistance in such cases—explore options for financial advice to find the help you need.

Or if you’re over 50, you can also book a free 60-minute appointment with Pension Wise, which can offer free, impartial guidance on your retirement options.

15 – What happens when I retire?

Once the money is in a pension, it can’t be withdrawn willy-nilly. It must stay there until you’re at least 55 (unless any extenuating circumstances apply; it’ll be aged 57 from 2028 onwards). At that point, you can take 25% of it as a tax-free lump sum, with the rest ideally providing an income for the rest of your life…

Important! If someone tells you that you can access your pension funds before you reach 55, be cautious—this is a scam often referred to as pension liberation or unlocking. For comprehensive information on how to legitimately access your pension and avoid scams, refer to our Pension Liberation Guide.

However, once you turn 55, you’ll need to make some important decisions. You have the option to continue working for as long as you wish, but once you choose to retire, you’ll need to decide how you want to manage your pension.

You can withdraw up to 25% of your total pension pot (or from each individual pot if you have multiple) as a tax-free lump sum. This amount can be used as you see fit, though taking any amount is not mandatory. For the remaining funds, your options generally include:

• Leave the money where it is, to continue getting interest or investment growth.
• Use the money to buy an annuity, where you get a set income for life.
• Go in to drawdown, where you take a sum from the pension pot each year.

Please be aware that if you have already withdrawn a 25% tax-free lump sum from your pension, any additional withdrawals will be taxed according to your marginal rate. This means if you are a basic-rate taxpayer, you’ll be taxed at 20%. If you fall into the higher or additional-rate categories, you’ll face a 40% or 45% tax rate, respectively, or the rate that applies based on the total amount you have taken from your pension.

Accessing your pension for the first time?

When you tap into your pension for the first time, your pension provider is required to inform you about Pension Wise. This service offers a complimentary 60-minute consultation to explore your retirement choices. Additionally, your provider must either assist in scheduling a Pension Wise appointment on your behalf or supply you with the necessary details to arrange it on your own.

While using this service isn’t mandatory, it can be highly beneficial, particularly if you’re uncertain about which options are best for you.

16 – You can do anything you like with your pension cash (just do it carefully so you don’t pay too much tax)

The pension freedoms that came into effect in 2015 allow individuals aged 55 and older to withdraw their pension funds in any manner and at any time they choose.

For the majority of people, it will likely be premature to access their pension funds at 55, so leaving the money invested is often a suitable choice. However, if you prefer, you can withdraw the entire amount at once: the initial 25% is tax-free, while the remaining 75% will be subject to income tax.

If you decide not to withdraw your entire pension, here are the options available for the remaining funds:

• Option 1 – leave it invested in your pension for when you need it. It’s crucial to grasp that when you take out cash, you can withdraw 25% of each amount tax-free. For instance, if you have £100,000 and decide to withdraw £20,000, you’ll receive £5,000 of it without paying taxes—any amount beyond that will be taxed according to your current tax rate.
• Option 2 – take 25% tax-free, then do ‘income drawdown’ on the rest. During a drawdown, you maintain the remaining investments with the intention of continued growth, while also having the option to utilize them for income when necessary.
• Option 3 – take 25% tax-free, then buy an annuity. This gives you a guaranteed income each year for the rest of your life.

17 – What happens to my pension when I die?

Although it might not be a pleasant topic, understanding how your pension is handled after your death is crucial. Key points to remember include that you cannot bequeath a company or private pension through your will. Additionally, pensions are exempt from inheritance tax.

You must declare who should get your pension pot

When establishing a workplace or personal pension, you’ll need to fill out an ‘expression of wishes’ form, also known as a ‘nomination’ form. This document outlines who you’d like to receive your pension savings in the event of your death before retirement. Although pension administrators are not legally required to adhere to your preferences, they generally consider them.

Even if you completed the form some time ago, it’s wise to review it periodically—particularly if your life circumstances have changed. For detailed information, refer to our Expression of Wish Guide.

Is my pot subject to inheritance tax?

The specific regulations vary based on factors such as your age at the time of death, whether you had begun drawing from your pension, and the type of pension plan you have.

For a comprehensive overview, refer to our detailed guide on “Inheriting a Pension: What Happens and Do I Pay Tax?” However, as a general summary:

– Money purchase schemes

Money purchase schemes, which cover most private company pensions, are typically NOT considered part of your estate upon your death.

Therefore, it’s crucial to designate one or more individuals, a charity, or an organization to inherit your pension benefits.

These designations are significant both before and after you begin drawing from your pension, as defined contribution (DC) pensions can be transferred to other individuals.

By completing an ‘expression of wishes’ form with your pension provider(s)—also known as naming beneficiaries—you can indicate who you wish to receive your pension upon your passing and specify the percentage of the pension each beneficiary should receive.

The amount they ultimately receive will depend on:

• If you die BEFORE you turn 75:

– and you HAVEN’T started taking your pension, the recipient usually won’t be liable for any tax on it (as long as the pension is paid within two years of your death). In this scenario, your beneficiaries can choose how to receive your pension – as a lump sum, drawdown, or via an annuity.

– and you HAVE started taking your pension, how you’ve chosen to access it will determine what your beneficiaries can do next.

If you’ve withdrawn a lump sum and have remaining cash in your bank account, this will be counted as part of your estate and will be subject to inheritance tax.

If you’ve opted for drawdown, your beneficiaries can access whatever’s left in your pension entirely tax-free. They can then use this for further drawdown payments, take a lump sum or buy an annuity.

If you’ve already started receiving income from an annuity before you die, this usually stops when you die and can’t be passed on to a beneficiary.

• If you die AFTER you turn 75, the person who gets your pension will usually pay tax at their normal rate (20%, 40% or 45%, depending on how much they earn) on anything drawn from the pension. It doesn’t matter whether you’ve started taking your pension or not.

  To avoid this, it’s worth thinking about whether to withdraw any available tax-free cash prior to your 75^th birthday.

Keeping your expression of wishes or nominated beneficiaries updated is crucial, especially after significant life events like divorce or remarriage. This ensures that the individuals you want to inherit your pension in the event of your death are correctly designated.

It’s also advisable to revisit these designations when you turn 75, as beneficiaries will then be liable for taxes on the amounts they receive. At this point, you might consider naming beneficiaries such as grandchildren, who could potentially face lower tax rates.

If you fail to nominate beneficiaries or complete an expression of wishes form, your pension provider will decide where the funds go. Typically, this will be to your next of kin or those who are financially dependent on you.

In the absence of next of kin or dependents at the time of your death, and without any nominated beneficiaries, a pension lump sum will generally become part of your estate and could be subject to inheritance tax.

Another benefit of submitting an expression of wishes form for your defined contribution (DC) pension is that your nominated beneficiary can also appoint a successor. This means that if your primary beneficiary passes away and there are remaining funds from your pension, those funds can be transferred to the next designated beneficiary.

In such cases, the funds will generally not be subject to inheritance tax, although they may be taxed as income depending on whether the secondary beneficiary is under or over the age of 75 at the time of their death.

– Final salary schemes

When it comes to final salary pensions, the rules regarding what happens after death can differ depending on the specific scheme. However, the key factor that typically influences these rules is whether you were retired at the time of your passing.

• If you die AFTER you start taking your pension:

In general, a pension from a final salary scheme is typically transferred to a dependant of the deceased, such as a spouse, civil partner, or child under the age of 23. Some schemes have been revised to extend benefits to cohabiting partners, even if they are not legally married or in a civil partnership. Additionally, if a child is financially dependent due to a physical or mental disability, they may continue to receive the pension regardless of their age.

When a final salary pension is inherited by a dependant, the income is subject to the beneficiary’s income tax rate, irrespective of the pension-holder’s age at the time of death (in contrast to money purchase schemes). If there are no eligible dependants at the time of death, the pension benefits will cease.

• If you die BEFORE you start taking your pension:

– and you’re under 75, your pension may pay out a lump sum (usually a multiple of your salary) to a dependant. This payment will be tax-free for your beneficiaries (as long as it’s paid within two years of your death).

– and you’re 75 or older, your pension may pay out a lump sum (usually a multiple of your salary) to a dependant. Your beneficiaries will pay tax on it, at their usual income tax rate.

– State pension

There are some circumstances where it’s possible to pass on your state pension payments after death, but the money can only go to your spouse or civil partner.

The main pension rules governing state pensions in death differ depending on whether you reached state pension age before or after 6 April 2016.

18 – What happens to my pension if I get divorced?

New divorce legislation took effect in April 2022, streamlining and accelerating the divorce process. However, it’s crucial to pay attention to pension allocations during a divorce. This is particularly important if one partner has significantly fewer pension assets, which can frequently happen if they have been a stay-at-home parent.

In a divorce settlement, pensions can typically be divided in one of three ways:

• A pension sharing order is a legal decree issued by the court. It reallocates part or all of one spouse’s pension funds into a pension account held by the other spouse, treating it as if the latter had contributed to the pension directly. The recipient can then access the funds in accordance with the scheme’s regulations.
• A pension attachment order, or ‘earmarking’ as it’s called in Scotland, involves one spouse allocating a portion of their pension income to their former partner. However, the receiving spouse will only begin to get these payments once the paying spouse begins to draw from their pension.
• Pension offsetting involves considering pension assets during a settlement, where one spouse agrees to receive a larger portion of non-pension assets—such as a greater share of a home—in exchange for relinquishing their claim to a portion of the pension. This arrangement can be made without the need for a court order.

Dividing pension assets is complicated, so consider getting legal advice before making any decisions. If you’re going through a divorce, you can also get free pensions advice from the Government’s MoneyHelper service.

19 – How safe is my pension?

When it comes to savings accounts, there’s a straightforward guideline: if your bank fails, up to £85,000 per individual per bank is completely safeguarded. This coverage is offered by the Financial Services Compensation Scheme (FSCS) in the UK (refer to the Savings Safety Guide for more details).

Since 1 April 2019, the £85,000 FSCS limit has been extended to include pensions and investments. Previously, the FSCS limit was set at £50,000, though annuities were and still are fully covered with no limit.

FSCS protection for pensions can be quite intricate, so it’s important to consult with your provider for specific details.

Typically, the FSCS does not cover losses due to poor investment performance, such as if the shares you invest in fail. However, it does offer protection against poor management of your investments.

FSCS coverage is applicable if you lose money due to the bankruptcy of your pension or investment firm. Generally, when you invest through a broker, the broker does not hold your funds directly but rather facilitates your investment into various funds or assets. Consequently, if the broker were to go bankrupt, your funds should remain safe, as they are held by the fund manager or bank. The £85,000 FSCS protection would apply if any of those entities were to fail.

When protection measures are activated, the Financial Services Compensation Scheme (FSCS) will initially attempt to move your funds from the insolvent company to another institution.

For Independent Financial Advisors (IFAs) or brokers who have mis-sold or provided dubious pension advice, you might be able to make a claim through the FSCS for mis-selling. This claim can be made up to the investment limit of £85,000.

If you hold a defined benefit (final salary) pension, there is a potential risk of your employer going bankrupt, which could result in a loss of your pension income. In such situations, the Pension Protection Fund (PPF) may offer compensation to help mitigate the loss.

What if I’ve held the money in cash?

If you choose to keep your SIPP funds in cash, they generally fall under the same £85,000 protection per person per institution as regular cash savings.

Inquire with your SIPP provider about the specific bank or banks where your cash is held (they may use up to five different banks). Next, check if your other savings are with banks that are connected to those used for your SIPP cash. Remember, the £85,000 protection limit applies to the total amount held across these linked institutions. Make sure you understand what constitutes a financial institution.

FSCS protection for pensions is very complex, and can vary with each product’s structure. This is just a general guide, always check with your provider.

20 – Can I also save into a Lifetime ISA?

If you’re under 40, you have the option to open a Lifetime ISA to save for either your first home or retirement, with the Government offering a 25% bonus on your savings – effectively giving you £1 for every £4 you save.

However, if you’re employed, contributing to a pension is often the more financially advantageous choice. This is because your employer is required to make contributions to your pension, whereas they don’t contribute to a Lifetime ISA.

For a full comparison, take a look at Lifetime ISAs vs pensions.