Category: Pensions

When you start thinking about how you’ll create an income in retirement, it’s probably your pension that comes to mind. Yet, if your estate could be liable for Inheritance Tax (IHT), it could make sense to use other assets first.

IHT is paid after you pass away if the value of all your assets exceeds certain thresholds. It can significantly reduce how much you leave behind for loved ones. However, there are often steps you can take to reduce a potential IHT bill, including assessing how you’ll use assets in retirement.

Inheritance Tax receipts reached a record high in June 2022

According to HMRC, IHT receipts between April 2022 and June 2022 were £1.8 billion. The sum is £0.3 billion higher than the same period last year and IHT receipts reached a record high in June 2022 due to high-value payments.

HMRC expects IHT payments to continue rising thanks to inflation and a freeze on thresholds.

The value of some of your assets, such as property or an investment portfolio, may be rising. Yet, the thresholds for paying IHT are frozen until 2026. As a result, more families are expected to pay IHT if they don’t take steps to reduce their tax liability.

There are two key allowances to consider if you’re reviewing if your estate could be liable for IHT:

1. Nil-rate band: For the 2022/23 tax year, the nil-rate band is £325,000. If the value of all your assets is below this threshold, IHT will not be due.
2. Residence nil-rate band: If you leave certain properties, including your main home, to your children or grandchildren, you can also take advantage of the residence nil-rate band. For the 2022/23 tax year, it is up to £175,000.

If you maximise both allowances, you can pass on up to £500,000 before IHT is due.

IHT is not due when you’re leaving assets to your spouse or civil partner, and you can also pass on unused allowances. So, if you’re planning as a couple, you may be able to leave up to £1 million without paying IHT.

The standard IHT rate is 40%. If it’s something your estate could be liable for, it’s important to be proactive to ensure you pass on as much as possible to your loved ones.

While you may consider gifting assets during your lifetime or making charitable donations, one potential option you may have overlooked is leaving your pension untouched.

For Inheritance Tax purposes, your pension is outside of your estate

Your pension is likely to be one of the largest assets you have. In fact, according to a report from the Office for National Statistics, private pension wealth represents a greater share of household wealth than property.

Crucially, the money held in your pension is usually considered outside of your estate for IHT purposes.

So, while your first instinct may be to access your pension to create an income in retirement, it could make financial sense to deplete other assets first and leave your pension for your loved ones.

The beneficiary of the pension may need to pay Income Tax at their nominal rate when they access the savings. The rate will depend on the age you pass away and how they access it, but it could be lower than the IHT rate.

If you’re concerned about IHT and leaving your pension to loved ones is something you’re considering, it’s important to review your long-term financial plan. You should understand how you’ll create an income in retirement that allows you to meet your goals, and what other steps to reduce IHT may be appropriate.

You will need to complete an expression of wishes to pass on your pension

Your pension isn’t covered by your will. The pension scheme administrator has the final say over who receives your pension when you pass away.

You can use an expression of wishes to tell the administrator who you would like your beneficiaries to be. It’s important you complete this. If you don’t, your pension may not be inherited by the person you want.

You will need to complete an expression of wishes for each pension you hold.

Creating a long-term financial plan that suits you

When you plan your retirement or pass on wealth, it’s normal to have lots of questions. We’re here to help you answer them and provide advice.

Whether you’d like to understand how you can mitigate IHT or how to use your assets to create financial security in retirement, please contact us to discuss your needs.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate will writing, tax planning or estate planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts. 

Pension auto-enrolment means that if you’re employed you’ve likely been automatically enrolled into a pension and contributions are deducted from your pay. However, the minimum contributions may not be enough to secure the retirement you want, and the sooner you identify a gap, the more options you have.

The current minimum contribution is 8% of your pensionable earnings, with 5% deducted from your salary and your employer adding the remaining 3%.

In many cases, the minimum contribution levels will not accumulate enough pension wealth to secure the lifestyle you want. It’s important to understand what income you want in retirement and the steps you can take to achieve this.

Just 27% saving for a “moderate” retirement lifestyle think they’re saving enough

The Pension and Lifetime Savings Association (PLSA) asked pension savers whether they think they’re saving enough for retirement.

Around three-quarters said they were, however, this fell significantly when they were asked about the retirement lifestyle they want to achieve.

41% of people said they wanted a “moderate” lifestyle, described as covering their basic needs and allowing them to do some of the things they would like in retirement. Just 27% believe they’re saving enough to reach this goal.

In addition, 33% said they were saving for a “comfortable” retirement that would allow them to do most of the things they would like. Only 14% of people with this goal feel they’re taking the right financial steps now.

Nigel Peaple, director of policy and advocacy at the PLSA, said: “We have long argued that current contribution levels are not likely to give people the level of income they expect or need.”

The organisation is calling on the government to gradually increase minimum contribution levels for both employers and employees.

Increasing your pension contributions now could afford you a more comfortable retirement and mean you’re financially secure in your later years. If you’re not sure how your pension contributions will add up over your working life and the lifestyle it will afford you, we can help you create an effective retirement plan that will give you confidence.

3 more reasons to increase your pension contribution

1. You’ll receive more tax relief

When you contribute to your pension, you receive tax relief. This means that some of the money you would have paid in tax is added to your retirement savings. Essentially, it gives your savings a boost and the more you contribute, the more you benefit.

Remember, if you’re a higher- or additional-rate taxpayer, you will need to complete a self-assessment tax form to claim the full tax relief you’re entitled to.

There is a limit on how much you can add to your pension while still benefiting from tax relief known as the “Annual Allowance”. For most people, this is £40,000 or 100% of their annual income, whichever is lower. If you’re a higher earner or have already taken an income from your pension, your allowance may be lower. Please contact us if you’re not sure how much your Annual Allowance is.

2. The money is usually invested

Usually, the money held in your pension is invested.

As you’ll typically be saving over decades, this provides you with an opportunity for your contributions, along with employer contributions and tax relief, to grow over the long term. It means your pension savings could grow at a faster pace and create a more comfortable retirement.

If you want to invest for the long term, doing so through a pension can be tax-efficient.

Keep in mind that your pension usually won’t be accessible until the age of 55, rising to 57 in 2028, and that investment returns cannot be guaranteed.

3. You could pay less tax through salary sacrifice

If you want to increase your pension contributions, it’s worth talking to your employer to see if they offer a salary sacrifice scheme. It could mean you have more for retirement while reducing your tax liability now.

As part of a salary sacrifice scheme, you, as the employee, would agree to reduce your earnings, while your employer would agree to pay the amount your salary has reduced by into your pension. As your income will be lower, you may be liable for less Income Tax while increasing your pension.

Again, keep in mind that you won’t be able to access your pension savings until you reach pension age.

Contact us to understand how you can get more out of your pension

If you’re not sure if you’re saving enough for retirement or want to understand how you can make your contributions add up, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts. 

The latest figures from the Pension Regulator prove that pension auto-enrolment has been a success – more people than ever are saving into a pension. Yet, research also shows that many people don’t think they know enough about saving for retirement.

Before the government introduced auto-enrolment in 2012, just 4 in 10 private sector workers were actively saving into a pension. Now, more than 70% of employees are taking steps to secure their retirement.

According to the Office for National Statistics, pensions represent the largest portion of private wealth in the UK. Individuals hold £6.4 trillion in pensions. The figure compares to £5.5 trillion in property and £2 trillion in cash. 

The number of people saving for retirement is rising and the accumulated wealth in pensions is certainly good news, but simply paying into a pension isn’t enough to be sure of a comfortable retirement.

Engaging with your pension and understanding how it’ll create an income when you retire is crucial, and research suggests that many people aren’t confident about their pension knowledge.

6 in 10 people couldn’t confidently say how much they have in their pension

7 out of 10 people can confidently say how much they hold in their cash savings, and 53% said they could estimate the value of their property quite accurately, according to an Aviva survey.

However, just 4 in 10 say the same about their pension despite pensions representing a larger portion of wealth and being crucial for your long-term financial security.

Saving into a pension under auto-enrolment is an important first step, but if you’re not reviewing your pension and what it means for your retirement it could put your long-term wellbeing at risk. Closing the knowledge and confidence gap is just as important as encouraging more people to save through a pension, and it could help you get more out of your savings.

What happens when you pay into a pension?

If you’ve been automatically enrolled into a pension, your contributions will be deducted from your pay cheque, so it’s easy not to think about what happens to the money. But engaging with your pension can help to ensure you’re taking the steps you need to secure your retirement.

As well as your own contributions, in most cases, your employer will contribute on your behalf. On top of this, you will receive tax relief on your contributions to boost your savings even further. This makes a pension a tax-efficient way to save for retirement.

The money within your pension will usually be invested. This could allow your pension savings to grow over the long term. If you haven’t selected how you’d like the money to be invested, it will usually be through a default fund. You will usually have a choice of multiple funds, covering a range of investment risk profiles, allowing you to choose one that’s right for you.

Here are some key questions you should answer to help you understand how your pension savings are building up:

• What contributions do you make to your pension?
• What contributions is your employer making?
• Are you claiming the full amount of tax relief you’re entitled to?
• How is your pension invested?

How do you know if you’re saving enough for retirement?

While you may understand how much is in your pension, understanding if it’s “enough” is much more difficult. To do this, you need to consider two things:

1. How much money do you need to fund your retirement? This will depend on your retirement plans, such as the lifestyle you want. You will also need to consider how long your retirement will last and what other assets you may have to complement your pension.
2. How will the steps you’re taking now add up over your working life? This means calculating how all the contributions will add up and what you realistically expect the investment returns to be.

Understanding if you’re on track for the retirement you want is important. If there is a gap, the sooner you know, the more options you’re likely to have. Spotting a gap early in your career may mean you can increase your contributions by relatively little as it’ll add up over several decades. If you don’t recognise a gap until you want to retire, you may have to delay or change your plans.

Having confidence in your pension means you benefit from peace of mind now and fully enjoy your retirement when you’re ready. If you’d like help understanding your pension, what it means for retirement, and how it fits into your overall financial plan, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.

The pension gap between men and women is closing. But, once life expectancy is taken into consideration, women still need to save an extra £185,000 for retirement, on average, according to the Scottish Widows 2021 Women and Retirement report.

The report finds that young women in their 20s today can expect to have around £250,000 in their pension by the time they retire. For men, the figure is £100,000 higher at £350,000. On top of this, women are expected to live for longer and pay for the associated care costs of this, so they need to add a further £85,000 to be financially secure throughout retirement.

To reach this goal, women in their mid-20s today will need to save an extra £2,500 each year, or £210 a month, until they retire.

Jackie Leiper, managing director of workplace savings at Scottish Widows, said: “It’s well known that the gender pay gap has a damaging affect on women’s retirement prospects. But women face a double whammy: even if we close the pension savings gap, pension equality would still not be achieved, because women need to fund a longer retirement and spend more on associated care costs.”

One of the reasons highlighted for the pension gap is the gender pay gap. The median salary for a man is £31,400, for a woman, it’s £20,500. It means even if men and women contribute the same portion of their salary to a pension, women are much more likely to face financial insecurity in retirement. Taking control of your pension before you retire can help you achieve long-term goals and have confidence.

3 things women can do to improve their financial security in retirement

1. Don’t forget about your pension when taking a career break

One of the reasons women have smaller pension pots on average is because they’re more likely to take a career break. Whether to raise a family, care for elderly relatives, or another reason, this can affect your retirement plans.

It can be easy for pensions to slip your mind when you’re not working, as contributions will often be automatically deducted from your paycheque. But this doesn’t mean you have to stop adding to your pension when you’re not at work. You won’t benefit from employer contributions, but you will still receive tax relief to deliver a boost to the money you put in.

You can add pension contributions to suit you. This could mean setting up a direct debit to take a specified amount regularly or adding one-off sums when you can. This flexibility means you can stop and start pension contributions depending on your circumstances.

2. Boost your current pension contributions

The report also measures the proportion of men and women that are deemed to be saving adequately for their retirement. This is defined as those saving a minimum of 12% of their pensionable earnings into a pension. This figure compares to the minimum auto-enrolment contribution of 8%.

The good news is that the gap between men and women saving adequately for retirement has closed. 6 in 10 men and women are now found to be saving enough for a comfortable retirement. Yet, that means 4 in 10 could still face financial struggles when they retire.

If you have the means to do so, even a small increase in regular pension contributions can have a large impact. These contributions will benefit from tax relief and be invested with the goal of delivering long-term growth. Over a career, the effect of compounding means your pension contributions can grow significantly.

3. Have a clear target for your pension

While the report gives an idea of how much women need to save for retirement, it can vary a lot for different people. If you’re still working, retirement can seem like a long way off, but thinking about your plans now can help you set a clear target and give you confidence that you’re on track. Answering questions like the below can help build an accurate pension target that’s right for you.

• At what age would you like to retire?
• Do you want to transition into retirement?
• What kind of retirement lifestyle would you like?
• What will your financial commitments be?

By taking this information, along with areas like life expectancy and expected investment growth into consideration, you can better understand if the steps you’re taking now will mean you can reach your retirement goals.

Getting to grips with your pension can be challenging. If you’re not sure where to start, we’re here to help you. Whether you’re still working or are ready to retire, we can offer advice and guidance to help you make the most of your pension contributions.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Most workers are now paying into a pension. But research shows that there is a worrying lack of understanding about how pensions work and why they’re a good option for saving for retirement.

According to Royal London, seven in ten people admit they have little or no knowledge about pensions. Understanding your pension while you contribute can help you get the most out of it and ensure that you understand what it means for your retirement. If you’re unsure about why pensions are used to save for retirement and what happens to your contributions, here are the basics you need to know.

Your pension contributions are invested

The research highlighted that many workers paying into a pension don’t understand what happens to their money.

The money you contribute to a pension is invested. This means the value of your pension can fluctuate depending on investment performance. As you may be paying into a pension for decades, investing aims to help your contributions grow over the long term. As you aren’t making withdrawals from your pension, the returns delivered are invested themselves. This means you benefit from compound growth and your pension can grow even further.

Despite this, just 24% of those with a pension see themselves as an investor. This goes some way to explaining why pension savers aren’t engaging with their investments. Half admitted they have never looked at where their pension is invested. Nearly one in ten (9%) didn’t realise this information was available and 27% didn’t know they could change how their pension was invested.

If you haven’t made any changes, your pension will usually be invested in a default fund. However, pension schemes will offer a variety of funds to choose from. So, it’s worth reviewing these and seeing if alternatives are better suited to your retirement goals. If you’d like some help assessing your pension investments, please get in touch.

Your employer will make pension contributions 

If you’ve been automatically enrolled in a Workplace Pension, your employer must also make contributions on your behalf. This applies to most workers.

The minimum they must contribute is 3% of your pensionable earnings. It can boost your pension and make your retirement more comfortable. However, if you stop making pension contributions, your employer no longer has to contribute either. As a result, you’d effectively lose ‘free money’.

You should review your employee benefits and talk to your employer too. Some employers will increase their contributions in line with yours or offer a salary sacrifice scheme that can provide a tax-efficient way to save more for retirement.

You also benefit from tax relief

The tax relief you receive when saving into a pension means it’s a tax-efficient way to save for retirement.

Assuming you stay within the limits of the Annual Allowance, you’ll receive some of the money you’d have paid in tax on your earnings back to add to your pension. It’s a valuable relief that can boost your pension investments. You receive tax relief at the highest rate of Income Tax you pay.

If you’re a basic-rate taxpayer and want to add £100 from your salary to your pension, it would only cost you £80 thanks to the tax relief. For higher- and additional-rate taxpayers, it’s even more valuable as they’d only need to add £60 and £55 respectively.  

Again, if you stopped making contributions, you’d lose this ‘free money’ being added to your pension.

It’s tax-efficient when accessing your pension too

Retirement may still feel like a long way off, but how you’ll access the money you’re saving for this stage of your life is important too. A pension is an efficient way to save for your later years.

First, when you reach pension age, you can take a tax-free lump sum of 25% from your pension. It’s a step that can help you reach retirement goals. You can also choose to spread this tax-saving across withdrawals. At the moment, you can access your pension from the age of 55 but this will rise to 57 in 2028.

While an income taken from your pension may be liable for Income Tax, you don’t usually pay tax on investment returns. The favourable tax treatment of pensions means your pension investments can grow faster.

If you’re worried about Inheritance Tax, saving into a pension could also reduce the eventual bill. Please get in touch with us to discuss further how you can minimise Inheritance Tax.

What does your pension mean for your retirement?

Just as important as understanding how your pension works is knowing what kind of retirement lifestyle it will afford you. Understanding how your pension contributions will add up can help you prepare for retirement and means you’re in a position to make changes if needed. Please contact us to arrange a meeting to go through your pensions and retirement plans.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

The Financial Conduct Authority does not regulate estate and tax planning.