Understanding the basics

Pensions and retirement can be confusing if you don’t know the basics. And there are a lot of basics to get to know. But don’t worry, we can help.

Approaching retirement

You might be nearly ready to retire, or you might be looking to access your pension. Perhaps you just want to understand pensions a little better.

  • A pension is a long-term, tax-efficient investment that helps you save for your retirement.

    There are different types of pensions. You might have a pension which has been set up by your employer that you both pay into. Or you might have a pension that only you pay into, especially if you're self-employed. You might have more than one of each type of pension. These types of pensions are different to the State Pension which you may be entitled to.

    Pensions are a long-term investment. The benefits you receive from your pension plan will depend on a number of factors including the value of your plan when you decide to take your benefits. The value of your plan can go down, as well as up.

  • The State Pension is the main source of retirement income for a lot of people in the UK. You will only be able to receive the State Pension when you reach a certain age, likely to be in your late 60’s, and if you have paid enough National Insurance Contributions.

    To see how much State Pension you're due to get, and when, use the Government’s calculator.

    You can choose to defer receiving the State Pension to a later date. There’s more information about deferring your State Pension and benefits you could be entitled to.

    If you receive state assisted benefits and you start taking an income or a lump sum from your pension savings, it may affect these benefits. You should check this before you take any pension benefits.

  • Pension scams are on the rise in the UK. If you're taken in by a scam, you could lose all the money in your pension. But don't worry, we're here to help you recognise what to look out for. Pension scams typically start with an unexpected phone call, email or text. Find out more about signs of a pension scam.

  • There are some limits on how much can be paid into your pensions in a tax year before you have to pay additional tax.

    • There’s the Annual Allowance which is normally £60,000 in 2024-2025. Your annual allowance can be higher (if you have some leftover from previous years to carry forward), or lower (if you’re a high earner).
    • There’s also the Money Purchase Annual Allowance (MPAA). This applies if you access your pension ‘flexibly'. For example, taking certain types of lump sum. The MPAA is currently £10,000 per tax year.

    Annual allowances are very complex. If you think these may affect you, we recommend you seek professional advice. There will normally be a charge for advice.

  • You can start taking your pension from the age of 55 although from 6th April 2028, you will need to be 57. You can normally take up to 25% of your pension tax-free, the rest will count as taxable income in addition to any other income you may have, such as the state pension or income from employment.

    Your tax treatment depends on your individual circumstances. Your circumstances and tax rules may change in the future.

  • Amounts paid from your pension plans are normally taxable as income.  However, some amounts can be paid tax-free.  These allowances limit the tax-free benefits that can be paid from all your pension plans.  

    When you take the benefits from your pension, you can normally take a quarter (25%) of the value as a tax-free lump sum.  In some circumstances, a higher amount may be available.  The total amount of tax-free lump sums you can take from all your pension plans will be capped at the Lump Sum Allowance, currently £268,275.  If you have a protected tax-free lump sum or previously applied to HM Revenue & Customs for certain protections, you may be entitled to a higher amount.  

    The total amount of tax-free lump sums that can be paid from all your pension plans, including lump sum death benefits, will be capped at the Lump Sum and Death Benefit Allowance, currently £1,073,100.  If you’ve previously applied to HM Revenue & Customs for certain protections, you may be entitled to a higher amount.  

    Any lump sums taken in excess of these allowances will be taxable as income. 

  • Some pensions have features that could affect how much you get when you take your money. So it's important to check your pension, to see if these apply. You should do this before making any decisions about taking your money.

    Protected Tax-Free Cash Lump Sum – This will allow you to take more than 25% of your pension as a tax-free cash lump sum.

    Protected Pension Age - Your pension may have a Protected Pension Age which will enable you to access your money earlier than the normal minimum pension age.

    Guarantees or bonuses - These can include a guaranteed growth or bonus rate, a loyalty bonus or a fund bonus. These can also include a guaranteed annuity rate or a guaranteed minimum pension. These may only apply if you take your pension at certain times.

    Protection - This can include life cover or waiver of premium.

  • You can tell us who you'd like to leave your money to when you die. Simply complete a nomination form.

    • While this is not binding, this will be taken into account when paying out death benefits.
    • Remember to update this information if your wishes or circumstances change.
  • Debt can harm your retirement if you don’t deal with it. If you're looking to use your pension to pay off your debts it's important to make sure you've still got enough money to live on in retirement.

    Pension savings have a level of protection if you're made insolvent or bankrupt. If you withdraw savings, you lose this protection on the amount you take and your creditors (people you owe money to) may be able to claim all, or part of this sum. If you cash in all or part of your pension, it's no longer protected from any debt proceedings against you.

    When planning to pay off debts, it’s important to keep enough money to live on in retirement.

    You don’t have to do this alone.

What next?

We hope this information has helped. We think you can never know enough when it comes to your pension, so for more information about shaping the future you want, go back to Understand more

Are you ready?

If you're ready to think about your pension options, take the next step.

Your pension options

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