Thinking of Retiring? What You Need to Know About Retirement Pensions

An introduction to pension schemes & eligiblity

If you have paid 35 years of National Insurance contributions during your working life, you will be eligible for a state pension. If you have fewer than 35 years, your state pension will be reduced pro rata so 34 years of contributions will give you 34/35 of the full rate. If you have fewer than 10 years of contributions, you will not receive a state pension. 

It is very likely, however that you have a work-related pension and it’s important that you understand your pension scheme, what you will be entitled to and the eligibility criteria.

There are three main types of pension: 

Salary Sacrifice Pensions

With a Salary Sacrifice Pension, employees agree to a salary reduction in 'exchange' for the firm to put that amount into the pension for them. This results in both the employer and employee saving on National Insurance (NI) contributions, which results in a gain - and some employers also give some or all of their NI gain to employees too. One thing to consider is that with this type of pension you’ll have a lower salary which could have other implications in terms of statutory maternity pay mortgage applications, various benefits, employment and support allowance.

Working after state pension age: can you be forced to retire?

You can certainly continue working past your state pension age and usually for as long as you want to do so. The ‘default retirement age’ which was forced retirement at age 65 no longer exists. In some cases, however, an employer can force you to retire at a certain age (compulsory retirement age) but they have to give a good reason for this which could be because the job requires certain physical abilities as in the construction industry or the job has an age limit set by law as in the case of the fire service.  It may be that you ask your employer for reduced hours or part time work but they are quite within their rights to refuse your request.

Pension access and withdrawal

If you’re approaching your mid-fifties or state pension age, you may be considering your financial options.  If you have a workplace pension, it will not affect your state pension and, whilst you can’t claim your state pension until you reach pensionable age, you may choose to draw down your work pension much earlier. In this section, we consider the implications of both claiming and deferring your work or state pension.

Pension contributions and tax relief 

Currently, it’s possible to get tax relief on private pension contributions up to 100% of your annual earnings and you’ll either get this automatically or you’ll have to claim it yourself, depending on the type of pension scheme and the rate of income tax you pay.   If your employer takes workplace pension contributions out of your pay before deducting income tax or if your pension provider claims tax relief from the Government at the basic 20% rate and adds it to your pension pot, you will get tax relief automatically.  In some cases, you need to claim tax relief on pension contributions yourself – this is the case if:

• You pay income tax at a rate about 20% and your pension provider claims the first 20% for you (relief at source)
• Your pension scheme is not set up for automatic tax relief
• Someone else pays into your pension

This is quite a complicated issue and we would recommend taking advice from a pensions expert.  For further information take a look at www.gov.uk/tax-on-your-private-pension/pension-tax-relief. 

There are, however, a number of questions relating to pensions contributions and tax relief.

How much can I invest in my pension? 

There are limits on how much you can put into your pension and get tax relief. You can put more in but without tax relief there’s no point as it defeats the benefits of a pension.

• You can put in up to 100% of your earnings or £60,000 a year, whichever is lower. This is your annual allowance.
• You can get tax relief on up to £3,600 each year even if you earn less than this which means you can put £2,880 into a pension each year and it will be made up to £3,600 with tax relief.
• Anyone earning over £260,000 get a reduced annual allowance – the limit lowers by £1 for every £2 of income that goes over that figure. If you earn £300,000, you will only get tax relief on the first £40,000 you put in your pension each year.
• If you are over 55 and have taken income from your pension, you can only contribute up to a maximum of £10,000 a year, or 100% of what you earn, whichever is lower. This is to stop you taking large amounts from your pension and then putting it back in to get tax relief. But even if you're earning less than this (or nothing at all) you can still get tax relief on up to £3,600 a year.
• There's no longer a lifetime allowance, but the maximum 25% tax-free lump sum you can get is still £268,275. Although that means there's no overall maximum you can put in your pension during your working life, when you come to retire, you can only take 25% of the old lifetime allowance tax-free (which is £268,275) – even if your pension is larger.
• You can ‘carry forward’ unused allowances from the three previous tax years.This is mostly useful for larger earners who want to put in a big lump sum (maybe due to an inheritance or a big bonus) above the usual £60,000 annual cap.

What are the tax implications if I chose to work after state pension age?

Whatever type of work you do, it’s important to remember that any income you earn in retirement whether from your pension, employment or self-employment, dividends, bank or building society interest and some benefits is taxable at the standard rates. If you’re married or in a civil partnership, you will pay tax on half the income received from jointly held assets. You are not currently liable for National Insurance contributions in retirement whether or not you continue to work.

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Pension proivders and investment safety

We are all aware that investments can flourish or fail but the good news is that all registered pension schemes in the UK are regulated which means they must follow certain rules, systems and controls including how to manage the investment of your money. The Pensions Regulator regulates most workplace pensions set up by employers and the Financial Conduct Authority regulates pensions you set up yourself or one you have a contract with such as a group personal pension.  Penson providers must provide regular updates on their performance including how much money the scheme has – and your pension is protected so your money usually stays safe even if your pension provider or employer goes bust. It’s natural, however, to want to know how holds your pension funds and the safety of your pension.

Pension consolidation

If you have a number of pensions, you may be considering consolidating them into one pension pot and there are definite pros and cons relating to this.  

You may save on fees if the pensions are transferred to a cheaper pot, you’ll have less administration and paperwork, you can see your pension amount in one place so will have a clear idea of how much you have and newer pensions are often easier to access. 

The downsides to consolidating your pensions are that existing pensions may have investments more suited to your attitude to risk, your pensions may have exit penalties so may incur transfer fees and you could be giving up some valuable benefits. You will need expert advice on this before taking any action.

Inheritiance, divorce and pensions

At the time of writing this blog, if you die and there’s money left in your private pension, it’s not treated as part of your estate so there is no inheritance tax to pay but this is due to change from April 2027 although the new regulations are not yet in place. You can’t usually leave pension savings in your will. If you die before taking your pension, the provider/trustees will decide what to do with it so do fill out an expression of wishes form (a nomination form) telling them what your preference is – whilst this is not binding, it could prove useful. There are always questions about inheritance and state pension and also regarding pensions and divorce settlements.

Lost pensions

A few years ago, I received a letter from a company, I’d worked for years ago informing me that they were holding my workplace pension. I’d moved house several times in the intervening years and completely forgotten that I might have built up a pension over the seven or years that I’d worked there.  This, it seems is more common than you might expect.

What do you do if you think you may have a pension you’ve lost track of?

If you’ve moved house, without letting your pension provider know, if you’ve changed jobs a lot over the years or if your pension provider has merged or rebranded, it could be that you have lost your pension although just because you were employed doesn’t always mean you have a pension.   The Pension Tracing Service is a free service that helps you locate lost pensions from previous employers by visiting the official www.gov.uk  website or contacting them on 0800 731 0175. Bear in mind the following:

Before April 1975

If you left your employer before April 1975, it's likely you'll have had any pension contributions refunded. Also. some schemes didn't require members to pay contributions, so you wouldn't be entitled to any pension benefits if this was the case.

April 1975 to April 1988

If you left your employer between April 1975 and April 1988, were over age 26 and had completed five years' service by the time you left, a pension may have been kept for you. If you left with less than five years' service, you might have had your contributions refunded.

April 1988 onwards

If you left your employer after April 1988, you might be entitled to a pension. This is provided you had completed two years' service. If you left with less than two years' service, you might have had your contributions refunded.