Do I have to join a pension scheme?
This page gives you basic information on pensions and pension schemes. We cannot give pensions advice, such as which type of scheme might be best for you, or whether or not you should pay into a particular pension.
What are pensions?
Pensions are a way of helping you to save up towards your retirement.
If you live in the UK, you can usually get tax relief on contributions you pay into pensions. The idea is to encourage people to provide for their own retirement rather than rely on the state.
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 part of the pension as a tax-free lump sum.
The state pension age is increasing to 66 for those who were born on or before 5 April 1954. You can use the calculator on GOV.UK to find out when you will reach state pension age.
People born on or after 6 October 1954 but before 6 April 1960 will reach state pension age at 66.
The state pension age will increase to 67 between 2026 and 2028, and to 68 between 2037 and 2039.
If you reach state pension age on or after 6 April 2016, you fall under the flat rate state pension scheme, known as the new state pension.
If you reached state pension age before 6 April 2016, you fall under the old state pension system, the amount of which is made up of a basic state pension amount and sometimes an additional state pension amount, both of which depend on your National Insurance contributions record.
If you reach state pension age on or after 6 April 2016, you fall under the flat rate state pension scheme, known as the new state pension. This means that most workers, whether employed or self-employed, will build up entitlement to the same state pension over their working lives.
If you do not know your state pension age, see: When will I get my state pension?
To get the full new state pension, you need 35 qualifying years of National Insurance contributions (NIC) or National Insurance credits. You will normally pay NIC if you are working. You may be credited with NIC if you are getting certain benefits, for example, certain unemployment, sickness, parental or carer benefits. If you have fewer than 35 qualifying years, you will receive a smaller single-tier amount. But you need at least ten qualifying years to get any new state pension at all (unless you can use contribution periods in other countries to help you meet this condition).
The full new state pension is £168.60 per week for 2019/20.
Our guidance for pensioners explains how the state pension is taxed.
You do not have to claim your state pension when you reach state pension age. You can ‘defer’ (put off) claiming it. See: What is state pension deferral?
You can also find out more about the new state pension on GOV.UK.
The Government pays the basic state pension as a regular payment to eligible people who reached state pension age before 6 April 2016. If you reach state pension age on or after 6 April 2016, you must claim the new state pension.
The maximum basic state pension is £129.20 per week from April 2019.
Our guidance for pensioners explains how the state pension is taxed.
You do not have to claim your state pension when you reach state pension age. You can ‘defer’ (put off) claiming it. See What is state pension deferral? and What tax do I pay on my state pension lump sum?.
Additional state pensions only apply to individuals who reached state pension age before 6 April 2016.
Up until 5 April 2016, you were able to build up an extra state pension as well as the basic state pension when you were working.
This extra state pension was previously called the State Earnings Related Pension (SERPs), but this was subsequently changed to the state second pension or the additional state pension.
The state second pension was based on your NIC record and the level of your earnings.
For further information, see GOV.UK.
How can I check how much state pension I will get?
You can check how much state pension you are likely to get by going to your Personal Tax Account via GOV.UK, or you can request a statement by telephone or post – contact details are also given on GOV.UK.
What are stakeholder and personal pensions?
A personal pension plan is a way of saving for your retirement. You can set one up yourself, through a pension provider, and invest in it personally, as opposed to an occupational pension which is generally set up through your workplace. Your employer may offer you access to a group personal pension scheme through your job and may also pay into it. Employers are now required by law to offer a workplace pension scheme and to automatically enrol eligible employees into it. See: What is auto-enrolment?
A stakeholder pension is a special type of personal pension plan. It is available to both earners and non-earners. The tax rules are no different than those for personal pensions generally, but the scheme has to meet certain other rules, such as low charges.
Even if you do not have any earned income, for example, income from employment or self-employment, you can invest up to £3,600 each tax year in a personal pension. This total includes £720 of tax calculated at 20%, which means you only have to actually pay £2,880. This works out as £3,600 less 20% basic rate tax.
You pay personal pension payments or contributions net of basic rate tax. This means you only pay the net premium of 80%, after 20% basic rate tax, but you are treated as having paid 100%. Therefore, if you pay in a contribution of £80, the Government pays £20, meaning that £100 goes into your pension pot. More information is given under What tax relief do I get on pension contributions?.
If you are a Scottish taxpayer, see our section on Scottish income tax for information on tax relief on your pension contributions.
You can get a personal pension or stakeholder pension from financial services companies such as insurance companies, bank and building societies. These are known as pension 'providers'.
The pension provider invests the funds in the scheme, to pay your pension when you retire or decide to take money out (though there are restrictions on when you can do so). Depending on the type of investment you may have to pay some charges to the pension provider. The charges will come out of the pension contributions you pay, or ongoing investment management charges might be taken off the fund you build up.
When you draw your pension from a personal pension, the provider will pay the income under Pay As You Earn (PAYE), which means they will take tax off any taxable part of the pension. The provider will deduct tax according to your tax code.
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. Quite often, these were linked to insurance policies and any payments to the insurance policies were also treated as being pension payments.
Retirement annuity policies are able to pay out larger tax-free lump sums than personal pensions.
Payments to retirement annuity policies are made gross, without any tax taken off. You may still be entitled to tax relief, but you need to get the tax relief through your PAYE coding notice or your Self Assessment tax return.
If you are getting tax relief through your coding notice, the full amount of the payments you are making will be shown as an allowance on your coding. This means you are setting that amount against your income and only paying tax on the balance.
If you pay your tax through Self Assessment – for example, because you are self-employed – you must claim the full amount of the payment on the online or paper tax return. You will then get tax relief via your tax calculation for the year in question or you can carry back the payment to be relieved in the previous tax year.
When you draw money out of a retirement annuity, or take an income from them, they are paid to you under PAYE, in the same way as wages and personal pensions.
An occupational pension, sometimes called a ‘works pension’, is a pension scheme organised by your employer.
Occupational schemes can work in two ways:
- Defined contribution or money purchase arrangements
In these schemes, like personal pensions, you build up a pot of money and then have to decide how to use it when you come to retirement age.
- Defined benefit or earnings-based schemes
Members of these schemes do not build up an individual pot of money. Instead, the employer (and usually the employees or workers) contribute to a general pot of money from which the employer promises to pay an amount of pension to its members when they retire. The amount the members get is based upon how long they have worked for the employer and what their earnings were over their years of ‘pensionable service’. These schemes are becoming increasingly rare and many are closed to new joiners.
There is more information on occupational pensions in the employment section.
What is a rebate only or appropriate personal pension?
You used to be able to 'contract out' (that is, opt out) of the state second pension and state earnings-related pension scheme, even if you were only paying into a personal pension. If you contracted out using a personal pension scheme, HMRC paid some of your NIC to a personal pension of your choice.
This type of personal pension was called an appropriate personal pension (APP).
The amount of the rebate from HMRC to your APP scheme depended on your age and your earnings.
The HMRC payment was called the minimum contribution and was paid once your earnings were known at the end of the tax year.
If you contracted out of the state second pension and you earned less than a set limit, you also got a top-up to the minimum contribution paid into your APP.
You could also make additional payments of your own to an APP.
Some personal pensions were 'rebate only' which meant that the only money paid into the scheme was the NIC rebate. This type of personal pension was just intended to replace the additional state pension.
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, or join, a pension scheme, if they wish.
What are the rules for paying into pensions?
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 rules on how much you can take out (depending on the type of pension you have) and when you can take it.
Heavy penalties can apply if you break these rules, though from 6 April 2015 for personal pensions, these penalties mainly arise only if you try to cash in your pension too early.
You can save in more than one pension scheme at the same time, for example, in both a personal pension and an occupational pension.
Please see our separate page: Do you know how tax relief on your pension contributions works?
What are the annual and lifetime allowances?
These allowances should not impact on you if you are on a low income and only have modest pension savings. We mention them here briefly, for completeness.
There is an annual allowance of up to £40,000 (2019/20). For those with income exceeding £150,000, the annual allowance is tapered, at a rate of £1 for every £2 of income above £150,000. If the increase in the value of your pension rights or your contributions (including employer contributions) exceeds the annual allowance, there is a tax charge on the excess. But you may have unused allowance from any of the three previous years which can be offset against the excess amount. The tax rate of the annual allowance charge depends on the level of your taxable income.
In order to get full tax relief, the amount you pay in to your pension is restricted to the lower of:
- amount of your earnings; or
But you can always pay the equivalent of £3,600 gross (that is £2,880 net) even if you have no earnings.
If you have taken money out of a defined contribution or money purchase pension, the annual allowance drops to £4,000 (this is known as the money purchase annual allowance).
There is more information on the annual allowance on the GOV.UK website.
There is also a lifetime allowance (LTA), which has been set at £1,055,000 for 2019/20. If your total pension savings exceed this, you may be taxed on any amount over the limit when the pension starts to be paid or in certain other circumstances. This lifetime allowance charge is set at 25% if you take the additional savings as a pension and 55% if you take them as a lump sum.
You might have a different amount of lifetime allowance if you have applied to protect your pension at a higher level. This is a very complex subject and we do not cover it here.
When can I take my pension?
Pension schemes may have their own rules, so you will need to check with your pension providers what types of pensions you have, what you can take out and when you can take them.
We give detailed information on when and how tax law allows you to take money out of defined contribution or money purchase pensions (for example, personal pensions) on our pensions flexibility page. As there is a lot to think about, we suggest you read that guide in full before taking action.
Where can I find more information?
Pensions are complicated. The Pensions Advisory Service has an excellent website and a telephone helpline. The Pensions Advisory Service is an independent, non-profit organisation. It provides free information, advice and guidance on company, personal and stakeholder pension schemes.
The government offers a free service, called Pensionwise aimed at people thinking about taking money out of their pension. This provides basic information on your possible options.
HMRC have a general helpline for individuals, pensioners and employees, which you can phone if your question relates to income tax on your pension.
The website yourpension.gov.uk has information about the state pension.
For information about workplace or occupational pensions and auto-enrolment, read our guidance, or go to GOV.UK. There is also information about workplace pensions on the website workplacepensions.gov.uk.
The Pensions Regulator has produced information for individuals on auto-enrolment and warnings on pension scams which you may find helpful.
GOV.UK has more information on various types of pensions.