Pensions and employees
Pensions are a way of making sure you get a regular amount of money coming in during retirement. The UK Government gives tax relief on contributions you pay in to pensions. The idea is to encourage people to provide for their own retirement rather than rely on the state. This page gives some basic information on pensions.
Growth on your pension savings is generally free of tax. When pensions are paid out to you they are taxable, but you should be able to take some part of the pension as a tax-free lump sum. We look at some of the main tax benefits of pension saving in a recent news article (based on current law, although please note that tax benefits may depend on individual circumstances and may change in the future).
We cannot advise you as to which type of scheme might be best for you. We cannot advise on whether or not you should pay into a particular pension.
If you are an employee, you may have the option of different kinds of pension. You may pay into some of them automatically; you have to make an active decision to pay into others. You do not necessarily have to choose between pensions – you may be able to pay into more than one kind.
We look briefly at some of the main types that you may be able to have, but if you want more information on any of them, we suggest you go to our ‘tax basics section’.
What is the state pension?
The Government pays the state pension as a regular payment to eligible people who have reached state pension age. You can work out when you will reach state pension age by using the calculator on the GOV.UK website.
If you reach state pension age on or after 6 April 2016, you will fall under the flat rate state pension, known as the new state pension.
If you are an employee, and you earn more than a certain amount per week or per month, you will either be credited with National Insurance contributions (NIC) or pay NIC. The NIC you are credited with or pay helps you to qualify to receive the state pension.
You can read more about this in our news piece looking at NIC contribution records for low-paid employees.
There is more information about the state pension and the new state pension in our ‘tax basics section’.
What are stakeholder and personal pensions?
You can set up a stakeholder pension or a personal pension plan yourself and invest in it personally, or your employer may offer you access to a group personal pension scheme through your job and may also pay into it – this will usually be the case if they do not have an occupational scheme for you to join. If they pay into it, it is a tax-free benefit for you.
There is more information about stakeholder and personal pension schemes in our 'tax basics section'.
What are retirement annuity schemes?
If you took out a personal pension before 1 July 1988 it would have been called a retirement annuity policy.
There is more information about retirement annuity schemes in our ‘tax basics section’.
What are occupational pensions?
An occupational pension, sometimes called a ‘works’ pension, is a pension scheme organised by your employer.
Occupational schemes are becoming increasingly rare and many are closed to new joiners. Your employer is more likely nowadays to offer you access to a group personal pension arrangement (see above) than a traditional works pension.
The scheme may be either a defined contribution scheme, also known as a money purchase scheme, or a defined benefit scheme, also known as a final salary scheme.
If you are a member of an occupational pension scheme, your employer is likely to contribute to it. If your employer makes a contribution to your occupational scheme, it is a tax-free benefit for you.
Generally you can make extra payments of your own into the employer’s scheme. These are often called additional voluntary contributions (AVCs) or freestanding additional voluntary payments (FSAVCs). There are limits on the level of payments that can be made with tax relief, but these do not impact upon people on low incomes.
If you make contributions to an occupational scheme, your contributions are probably taken from your pay before your tax is worked out (‘net pay arrangements’), so you get tax relief immediately – provided you are a taxpayer. For example, if you pay tax at the basic rate of 20% and authorise a monthly contribution of £50, the actual cost of the contribution to you will be only £40, and you save tax of £10 (£50 at 20%). However you will not get any tax relief on your £50 contribution if your earnings are less you’re your personal allowance, which is £11,850 in 2018/19, meaning your £50 contribution will cost you £50.
For more information about this see our separate page: ‘Do you understand how tax relief on your pension contributions works?’.
What is a rebate only personal pension or appropriate personal pension?
If you want information on this type of pension, visit the 'tax basics section'.
Many employers now have to have an ‘auto-enrolment’ pension scheme. This means that they have to automatically enrol eligible workers into a qualifying pension scheme, if they are not already in one. Workers not automatically enrolled will also be able to opt in to a pension scheme, if they wish.
Providing your pension scheme provider agrees, there is no limit on the amount you can put into your pension. The tax relief you can get may be limited, however, and you should remember that once your money has been saved into a pension there are strict rules on how much you can take out and when you can take it. Heavy penalties can apply if you break these rules.
You can save in more than one pension scheme at the same time, for example, in both a personal pension and an occupational pension.
One point to note is that if you are a low-earner, you may wish to check which type of pension scheme your employer uses. If they use a ‘relief at source’ arrangement, the pension provider claims 20p tax relief back from HM Revenue and Customs (HMRC) for every 80p of your contribution received – no matter what the level of your earnings. This means that when you contribute 80p, £1 goes into your pension pot. Some pension providers do not use this method, and use a different approach to tax relief (called ‘net pay arrangements’), meaning employees do not get any tax relief if their earnings are less than their personal allowance, which is £11,850 in 2018/19.
Generally, the earliest you can take your personal pension is at age 55, although it is possible this age may increase once state retirement age increases.
For occupational pension schemes, your employer’s scheme rules give you details on pension age, but this will probably be around 55.
More information on the rules for taking your pensions is given in our 'pensioner section’.
If you are a member of a pension scheme set up by your employer and you leave your job – but you are not retiring – the pension pot is still yours.
You may have various options available to you, including:
- leave the pension where it is and draw it when you retire;
- continue paying into the pension after you leave;
- transfer the pension to a different scheme;
- get a refund of your pension contributions;
- start to take your pension.
You should always contact your pension scheme administrator, to check the rules.
We suggest that you also seek independent advice before making a decision, as it may affect the amount of your future pension income.
Some pension schemes allow you to transfer all or part of your pension pot to another pension scheme. Before making a transfer, you should check that both pension schemes will allow the transfer.
You might want to transfer your pension fund for various reasons. For example, if you have had several different employers, and as a result have a few smaller pension pots, you might want to bring them together. This might make administration and organisation easier for you in the future.
The decision to transfer a pension pot is not one you should take lightly, as you may incur charges and lose some rights.
There is more information on GOV.UK website.
As with all important investment decisions, we suggest that you seek independent advice.
If you have to give up your job because of illness, you might be able to get your personal pension before the usual age limit of 55.
If you do not meet the conditions and you receive pension income before you reach 55, you will have to pay tax at a rate of at least 40% on the ‘unauthorised payment’.
You cannot get your state pension before you reach state pension age.
Serious ill health
If you retire from your job due to serious ill health, you might qualify to take all your pension pot as a lump sum. Again, you must meet certain conditions, which are set out on the GOV.UK website. The conditions include that you must have evidence from a doctor confirming that you are not expected to live for longer than a year.
See our 'tax basics section' for a list of more sources of information.