Pension’s Q&A: This is What You Need to Know About Your UK Pension

Pensions are hugely complicated, and therefore you must get proper financial advice while making sure your loved ones are looked after, and your pension costs are being kept to a minimum.

Below are ten questions that we have received from across the website on a range of different subjects surrounding everything you need to know about pensions and how you can take advantage of them.

When Can I Access My Pension

Typically there are two types of pension plans that you can invest into and as such, three answers to the question

  • State Pension – If you were born before 5th October 1954 as a man or the 4th April 1960 as a women, you can access your pension at 65 and 60 respectively. If you were born after this date, you can access your pension at 66. Sadly more increases are planned. As it stands, the government plans to increase the retirement age to 67 between 2026 and 2028, and to 68 at some point between 2044 and 2046. If you’re under 30 today, you could have to wait until your 70 to receive your state pension
  • Private Pension (Defined Benefit or Defined Contribution) – As it stands within the current rules, you can start accessing your private pension from the age of 55. It’s possible that you can start accessing your money earlier, but this is usually reserved only for people with serious illness, or those with specific terms in their pensions. Much like state pensions above, the government has plans to increase the minimum when you can access a private pension from the current 55 to 57 from 2028. From then on, the minimum pension age will remain ten years below State Pension age.

How Much Is A State Pension

If you have paid a minimum of 10 years’ worth of national insurance contributions during your working career, you can have access to a state pension from the age of 66. If you have paid the full 35 years, you can have the maximum payment which is currently £175.20 a week.

If have paid between 10 and 35 years worth of national insurance contributions, you’re entitled to part of a state pension depending how many years you have paid. In this situation, you need to check your state pension on the website.

Defined Benefit Vs Defined Contribution

Whats the difference between a defined benefit pension plan and a defined contribution pension plan.

  • Defined Benefit Scheme – or a final salary scheme typically allows you to have a monthly income based on your final salary. The important part, it’s based on your final salary, not the actual salary that you’re receiving at the time you retire. The actual amount you’ll receive depends on the scheme rules, but most plans don’t include additional earnings such as overtime or bonuses, but will allow you to transfer your monthly income to your spouse, should you die either before and/or after your retirement date.
  • Defined Contribution – work by allowing you to save money over time, grow that money and take a monthly income in retirement. Defined benefits schemes are very expensive and thus being phased out over recent years, there replacement are very common whether its an employer-sponsored workplace pension or a person self invested pension plan (SIPP). All defined contributions work the same way, the value at retirement will depend on the following;
    • How much has been paid into the Account
    • How long the money has been invested
    • The Investment rate of return
    • The Charges of the Pension Plan

How Much Can A Self-Employed Person Save into A Pension

As it stands within the current framework, you can contribute up to £40,000 a year into a pension plan as long as you have not exceeded the Lifetime Allowance of £1,073,100. Remember, you will also get an ISA allowing you to contribute a further £20,000 and receive tax-free growth.

Will I Get A State Pension If I’m Self-Employed

Yes, you will get a state pension whether you’re an employee at a company or self-employed. If you’re self-employed, you will pay Class 2 contributions of 3.05 week if your profits are £6,475 or more a year and Class 4 contributions of 9% on profits between £9,501 and £50,000 and 2% on profits over £50,000 on profits of £9,501 or more a year.

If you complete the full 35 years of National Insurance contributions, aged 66 (rising to 67 in 2028) you can claim the maximum state pension which is currently £175.20 a week, although this will rise with inflation.

What to Consider Before Setting Up A Pension as A Self-Employed Person

You need to consider three key things before you start any pension plan.

  • Fund Choice – How does this compare with your risk level and performance targets. Remember, if you invest £200 per month between the ages of 23 and 66 (I.e., 44 years), and it grew by 8% each year, you would have a pension pot of £890,946. If it only grew by 6%, that same pension pot would only be worth £493,802. From an income point of view, using the 4% rule, this would be the difference between a yearly income of £35,638 and £19,752.
  • Annual Management Fees – The killer of return on investment is always how much it costs. You should look for a pension with charges lower than 1% to keep costs down. In the example above, if you has invested invest £200 per month and it grew by 6%, but you 2.5% of annual management fees on top, rather than a pension pot of £493,802, you’d have a pension pot of £364,672.
  • Pension Contributions – As a self-employed person, you need to make sure you have the flexibility to pay into your pension plan when you can, not when you have no money. It’s also a good idea to have the flexibility to allow lump-sum contributions for those days when your feeling rich.

What’s a Pension Drawdown

When you come to access your money at retirement, you have two choices, buying an annuity or pension drawdown. A pension drawdown allows you to take money out of your pension while leaving the rest invested in the stock market to continue growing. The earliest you can start taking your pension is currently set at ten years below the present state retirement age of 65, however, remember this rises to 67 years old in 2028 and thus the minimum age for pension drawdown will increase to 57.

As long as your pension allows terms allow it, you can withdraw up to 25% of your pension pot as a tax-free lump-sum and then take a monthly income which is either unlimited or if you have a capped plan, the upper cap limit. Sadly, pension income on a monthly basis is taxable in the same way as your earnings. As a result, you will get the first £12,500 tax-free, and then pay a basic tax rate on everything above this amount to the higher rate.

I Want to Cash in My Company Pension

One of the biggest questions I get across this website comes down to cashing in a pension and when you’re allowed to do it. Lots of people feel that if they only have a small pension with a company that they worked at for a couple of years, they would rather cash it in and just have the cash.

Technically, this is possible once you hit 55 years old, however, you will be hit with a large tax bill on the income, and therefore it’s not advisable. As I understand, you can only take money from a pension before 55 without being hit by steep tax charges if you have to stop working because of ill health.

The earliest age you can take money out of your pension is currently 55, although this will increase to 67 in 2028. Once you hit this age, you’re allowed to take 25% in tax-free cash and the rest is taxable.

What is Trivial Commutation?

If you have a pension scheme under £30,000 you may be able to take it as a lump-sum if you meet a set criteria. If you have a pension that is less than £30,000 and you’re over the aged of 55, you could potentially take it out, however, it will be subject to income tax.

What is A SIPP

I recently set up a SIPP, and you can read that here, however, a SIPP or a self-invested personal pension is a type of personal pension that is essentially a pension wrapper, that allows you to invest into a wide range of investments from shares and ETF’s, to gilts and corporate bonds.

The key benefit of a SIPP is that it offers a low-cost way to invest your money in your future. They are designed to be flexible while allowing you to make decisions on your future investments. Generally, this type of pension plan is best suited to those who have some experience of the markets and are happy to make their own decisions of their investments.

Within the current rules, you can pay 100% of your earnings up to a maximum of £40,000 per year into a SIPP, although if you have an annual income above £240,000, this is reduced by £1 for every £2 of income above this threshold, down to a minimum of £4,000. There is also a lifetime allowance which in the current 2020-21 tax year is £1.0731m.

If you want to start a SIPP for your children who are non-earning, you can pay up to £2,880 per tax year into a SIPP, and the taxman will add £720 to this taking your overall yearly contribution to £3,600 per tax year. Finally, you can access your SIPP from the age of 55, or 10 years below the state pensionable age. (Remember this will rise to 67 in 2028 as per current government guidelines). Once you have access to your SIPP, the first 25% is tax-free, anything after will be taxed at your current income tax level.

What Happens to A Pension When I Die

What happens to your pension when you die really depends on the type of pension and the terms from the pension provider.

  • Define Contribution – With a defined contribution plan such as a workplace pension or a personal pension where the more you pay into the plan, where your funds are invested, and how these investments have performed give you your pension pot, if you die before you retire, your savings are usually passed to your beneficiary, or if you die after you have retired, your beneficiary can expect a reduced pension depending on the rules from your pension provider.
  • SIPP – With a SIPP, if you die before the age of 75, you can transfer your pension income to your beneficiary, tax-free. If you’re older than 75, your beneficiaries will have to pay tax on anything they take out at the usual tax rate, 20% for basic rate payers, 40% for higher rate taxpayers and 45% if they are additional rate taxpayers.

My Partner Bought Annuity, Will I Get This After They Die?

Generally, this answer is no. That is unless you have bought a joint-life annuity which lets your partner have the income after you die.

Will My State Pension Go To My Spouse When I Die?

Generally, the answer is no. You saved for your state pension, and thus it’s yours to do what you want with. Once you die, it’s gone to the state. That said, depending on the amount of National Insurance contributions you have paid and for how long, you’re your spouse may be entitled to extra payments from your State Pension. If you’re not sure where you stand, it’s a good idea to, get in touch with the Pensions Service and understand what you’re allowed to transfer.

Final Thoughts

What other questions do you have? Leave a comment and we’ll give you the answer. is written by David Jacobs who is on a quest to retire early and get out of the rat race. David is a financial expert who lives for early retirement. Follow his journey making money, saving and investing to retire early and get the best out of his retirement.

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