Common questions about pensions answered
I’ve put together a list of some popular questions I'm asked about pensions.
How much can I pay into a pension?
In theory, you can pay as much as you like into your pension if you’re working. But there are limits in terms of how much tax relief you can get on those contributions.
Currently, you can pay up to £60,000 or the equivalent of your annual earnings, whichever is lowest, per tax year into a pension/pensions, before you would pay tax on your contributions. This includes contributions made by your employer.
If you earn £35,000 a year, then you can contribute £35,000 including tax relief you get.
If you earn £65,000 a year, then you can contribute £60,000 including tax relief you get.
How does pension tax relief work?
Think of pension tax relief as a bonus or tax refund when comparing it to money not put into your pension.
The government encourages people to save for retirement by effectively giving back the tax they would have otherwise paid.
If you’re a basic rate tax payer, you pay 20% income tax. If you make a contribution into your pension, the government basically pats you on the back and says, ‘good job, we’re not going to charge you 20% tax on that contribution – instead we will put that amount into your pension too’.
And it’s the same for higher rate tax (40%) and additional rate tax (45%).
Can I have more than one pension?
You can have as many pensions as you want. But be careful not to pay more than the maximum allowed per year (£60,000) before you pay tax on your contributions. This is not per pension, but a cumulative total across all pensions you might have.
What is auto-enrolment?
Auto-enrolment means your employer is obliged, by law, to enrol you into a workplace pension and make contributions. Minimum contribution requirements are 3% from the employer and 5% from the employee for a total of 8%. You/your employer can make higher contributions if you/they wish.
How much is the State Pension?
The current State Pension is £185.15 per week but this depends on your national insurance record of contributions. You need 35 years of National Insurance contributions to be entitled to the full State Pension. Check your National Insurance Contributions here.
How much should I pay into a pension?
The earlier you start your pension the better because it gives you more time for your money to grow in value. It’s known as compound interest, or growth.
A general rule is to take the age when you first started saving into a pension, halve it and pay that percentage into your pension. So, for example, if you started saving at 40 you should aim to pay 20% of your salary into your pension. Whereas at the age of 20, aim for 10%.
However, this rule is a best-case scenario, and everybody has personal circumstances regarding their finances. So it really comes down to as much as you can afford to pay into your pension. You need to find a balance between saving for retirement and having money to live today.
It’s worth adding that stopping your pension contributions completely should be a last resort.
What happens to my pension if I leave my current employer?
If you leave your employer, the pension you had with them will be still exist. So if you have a number of jobs over your lifetime, you may build up a number of different pensions. You might want to consider moving old workplace pensions into one pot.
Can I work and receive a pension income at the same time?
Yes – if you are 55 or older (57 from 2028), you can work while taking money from your pension. If you want to continue to make pension contributions, you could be restricted to the money purchase annual allowance of £10,000. This allowance usually kicks in when you start withdrawing money from your pension in certain ways. You could also work while receiving your State Pension.
Do I have to take my State Pension as soon as I’m allowed?
As you approach your State Pension age, you will get a letter telling you how much your State Pension is and when it will start being paid to you. You do not have to take your State Pension straight away.
Another option is to defer – put on hold – your payments. In some circumstances, Deferring your State Pension can be beneficial. The government rewards you by giving you an increase in the amount of State Pension you get if you decide to postpone taking it until a later date.
How much tax will I pay on my pension?
25% of your pension pot can be taken as tax-free cash.
The remaining amount of your pension is subject to income tax, like your salary. But you won’t pay National Insurance. Your pension scheme provider will take any tax you owe using the PAYE system before paying out your net pension income.
Does the government look after my pension?
Contrary to popular belief, the government only looks after the State Pension. Forms of private pension including a workplace pension are managed by private pension providers who invest your pension contributions.
Controls are in place to protect pension holders based on legislation set by government.
What happens to my pension if my employer goes bust?
Although your workplace pension is through your employer, it is not managed by them. So, if your employer went into administration, your pension would still be safe.
If the pension provider went bust (rare), the money in your pension would be protected up to a certain amount assuming the provider is regulated by the Financial Conduct Authority.
For workplace pensions, this is usually 100% of the value of your pension pot.
For Self-Invested Personal Pensions, it’s up to £85,000.
How do I find out if I have old pensions from previous jobs?
There are a couple of common things you can do to track down any old pensions you think you might have.
Firstly, simply contact any old employers and ask them if you were in a pension scheme when you worked for them. If the company has since dissolved or been bought by another company, this could be a bit trickier.
Secondly, you could try using the Pension Tracing Service. It may have details of whether or not a company you worked for had a pension scheme at the time.
Going forwards, make sure you keep two things safe – your pension plan number and the name of the pension provider. Save it somewhere safe. It will make things much easier later on.
What is my workplace pension invested in?
Your workplace pension is most likely invested in the stocks and shares market and fixed interest securities like bonds. Pension providers have a team of investment managers working on your behalf to invest your contributions and, hopefully, grow your pension pot over time.
Typically, workplace pensions try to reduce risk by investing in a broad range of assets. This is a common investing technique known as diversification.
Can I lose money in my pension?
There is a big difference between a paper loss – seeing the money going down, and an actual loss – cashing in/selling a stock when it’s worth less than when you originally invested it.
For most of your pension-holding life, you may notice losses on paper. This is due to the up and down nature of investing in the stock market. But pensions grow over time, usually in line with stock market growth.
The issue of losing money is more concerning when it’s time to withdraw your pension. At this point, having a withdrawal strategy in place is important. You may find taking advice from a financial adviser useful.
How much do I need in my pension when I retire?
The million-dollar question…quite possibly!
Unfortunately, everybody has different lifestyles and income needs, so it’s impossible to give generalised answers to a question like this.
You can assume that:
being mortgage-free at retirement will reduce a substantial amount of your basic spending needs
being in a relationship can make money last longer – splitting of bills, two state pensions for one household.
you should take life expectancy with a pinch of salt. We’re living longer and longer. If you’re in good health and have no family history of serious illness, your retirement may last longer than you think.
A financial planner can help answer this question by providing personalised advice.