The ‘sexy’ benefits of pensions

Published on December 6, 2019 by Andrew

For most people, pensions are boring – at least until you need to start drawing your income in retirement.

A recent study by financial technology firm Wealth Wizards found that around two in five workers are ‘not interested’ in their pensions or had failed to make any contributions, while 62% of people said they had not been able to save, even though they had wanted to.

According to Scottish Widows’ 2018 Retirement Report, more than one in five young people are still not saving anything for later life. This is more alarming given that research from Canada Life has highlighted that one in five 18-24-year-olds think the State Pension won’t exist by the time they retire.

So, what can be done to make pensions sexier? We look at the main benefits of pensions and what they can do for you.

8% of your earnings paid into your pension through auto-enrolment

To encourage more people to make private pension provision, auto-enrolment has been introduced across the UK. It makes joining a workplace pension easier as well as making saving more financially attractive as employers are obliged to pay into eligible workers’ pension schemes.

If you’re a member of your workplace pension, auto-enrolment means that, from 6 April 2019:

  • Your employer pays 3% of your qualifying earnings into your pension
  • You pay 4% of your qualifying earnings
  • You receive 1% of your qualifying earnings as tax relief

In total, 8% of your qualifying earnings goes into your pension.

Of course, you can increase the amount you contribute to your workplace pension in order to enhance your income in retirement.

Free money through tax relief

One of the key benefits of paying into a pension is that you receive tax relief on your contributions.

If you are a basic taxpayer, you receive 20% tax relief, meaning that if you pay £400 into your pension, the government will add an additional £100.

If you are a higher rate taxpayer, you will receive 20% tax relief directly, meaning that if you pay £400 into your pension, the gross contribution will be £500. You can then claim an additional 20% tax relief through your tax return, meaning that you’ll end up paying just £300 for a £500 contribution to your pension.

Former Pensions Minister, Ros Altmann, says: “We need to promote the ‘free money’ that accompanies contributions – pictures of £50 notes you can buy for £20, for example.”

In addition, once contributions to your pension scheme are invested, they grow largely free of taxes. This favourable tax treatment means that your pension fund should grow faster than equivalent taxable investment funds.

The other tax benefit of a pension relates to Inheritance Tax (IHT). Any Defined Contribution pension you have (depending on when you die) can be passed on to your beneficiaries without being included in your estate for IHT purposes.

If you die before your 75th birthday, then any pension can be passed on tax-free. Your beneficiaries can spend it when they want without incurring a tax bill — as long as they take it within two years – and they don’t have to be over 55 to receive it.

After your 75th birthday, there can be tax implications, although the eventual bill may still be lower than it would be on money outside of a pension.

Pension Freedoms offer flexibility on retirement

Before 2015, when you retired you could take up to 25% of your pension savings as a lump sum, and then use the remainder to buy an Annuity. This would give you a guaranteed income for the rest of your life.

Since Pension Freedoms were introduced in 2015, savers now have considerably more flexibility in how they access their pension savings. While many won’t consider this ‘sexy’, it does bring huge benefits to retirees who now have a lot more choice.

You can now:

  • Take up to 25% as a tax-free lump sum
  • Withdraw the remaining 75% immediately or in lump sums. You’ll pay income tax at your marginal rate on this cash
  • Leave your money invested and ‘draw down’ as much or as little as you want in income
  • Take out part of your savings and buy an Annuity to give you a guaranteed income.

Promoting the ‘sexy’ benefits of pensions

Considering the many benefits that saving into a pension can offer, experts have called for campaigns encouraging people to take more interest in their retirement savings.

Ros Altmann says: “A promotional campaign explaining the benefits of the ‘free money’ that comes from pension contributions, the tax-free investment returns, and inheritance tax cases for keeping funds into much later life is long overdue.

“Any promotion of this kind also needs to include the benefits of taking expert financial advice to ensure people make the most of the advantages.”

Taking financial advice can help you to plan for your future. If you have any questions about your pensions and retirement planning, please get in touch. Email at or call 0800 0787 182.

Please note:

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

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