Saving For A Pension 2023

Saving For A Pension 2023 

Jamie Benn, Financial Advisor at CS Financial Group talks us through pensions and how to save for the future.

Will I get a state pension if I’ve never worked?

More often than not, we find that somebody will have had partial service rather than never having worked. Maybe you worked some years and have had some gaps. How much pension you will receive is based on the percentage of service, and to receive a full pension you need 35 years of paid national insurance.

The minimum is 10 years to qualify for any type of state pension. Between 10 and 35 we would see a tapering of that allowance, which will tell us how much you would receive on a weekly basis.

What happens if I pay over £40k into a pension?

This question is to do with the money purchase annual allowance. In the past this was something of a bone of contention as the £40,000 figure hadn’t moved much. But now, the limit is set to become £60,000 in the next tax year.

What happens is that the tax benefit that you receive for paying up to £40,000 into your pension in a year, swings back the other way – it becomes a tax reducer. If you’ve started to pay over £40,000 a year into your pension, you would receive a taxable gain, like the lump sum you can take on retirement which would expand your basic rate band.

The government wants to prevent you from doing that, and as such it will be taken off your tax code at its highest marginal rate. That would mean you would receive a charge. From a tax perspective, if you tried to pay over £40,000 the charges will wipe away any benefit of doing that.

So it’s really important that when we are doing your figures we look at the gross figure that’s going into the pension. That includes any tax credits. We need to stay below that money purchase annual allowance, which is £40,000 this year and £60,000 next year [podcast recorded in June 2023]

How can I avoid paying tax on my pension?

Avoiding tax is perfectly legitimate – all of us would like to reduce our tax as much as possible, as long as it’s done in a legal way. It’s not evading tax. We’re not lying, cheating or manipulating the system. We’re following the tax rules set out for us.

I’m not going to be sending all your money to Gibraltar or any tax haven, but there are ways we can avoid tax perfectly legitimately.

There are various types of pension out there. Most of us on a new contract will find that we’re on a defined contribution pension, the newer style of pension. Previously there were defined benefit or final salary pensions. Tax works differently depending on when they were set up.

There are two big tax avoiders with pensions. The first one is on the contributions, which as we touched upon, will be grossed up. For example, as a basic great taxpayer if you put £80 into your pension, that contribution is grossed up to £100 by HMRC. So £100 goes into that pension.

That’s the simplest form of tax efficiency. With the £40,000 or £60,000 annual allowance, you’re saving £10,000 to £15,000 on tax per year, which is great.

Then there’s a slightly more complicated route, which I’m just going to call your pension lump sum payment. When you come to crystallise your pension, which means making it real life money, not just money on paper, you can take 25% of your pension pot tax free..

It does depend on the type of scheme that you’ve got. So we’ve put tax-free income or tax reduced income into that pension for 30 years or so, then we get to take 25% of that out as a lump sum and it’s untaxed.

There are more complicated ways to do it, as well. For self-employed people, as an example, pension contributions can go towards reducing income to keep you under the tax threshold. It all comes down to your personal situation.

A key thing is how far away you are from retirement. If you have 10 years to go, things are a little more urgent, or perhaps there’s a longer period of time where we can focus on tax efficiency rather than chasing high-risk investments to get the best gains.

How do I save for a pension?

People have different ways that work for them. I’ve got two big tips, however,

The first one is, if you’re not saving now and you’ve got some disposable income, you need to start. Sometimes it’s to do with your own mentality. Some people find it hard to reduce what they’re spending or cut back on a few treats. But it’s easy. We can just set up a savings account – perhaps one that you can’t see on your internet banking – and make a regular payment in.

If people have quite good money management skills and they are putting away into savings on a monthly basis, that’s the time to start considering topping up your pension instead. Once you’re a regular saver that can consistently put money away, start reviewing those pension options.

Once we’ve put this money into a pension, it’s not coming out until you’re age 55 at least. It’s money put away for your future. Of course if you’re 18 now, your priority isn’t to make sure when you’re 65 your pension is going to be brilliant – especially if between 18 and 65 you’ve got no money and you can’t afford to buy a house.

It’s all about balance. A good financial advisor won’t tell you to put all of your money into a pension at that point. It’s just about getting the ball rolling and starting up on that compound interest.

What else should we consider on saving for a pension?

One thing I’d always add is not to leave yourself in a situation where you don’t know what’s going on. That’s the worst thing you can do. You’re better off understanding your situation, whether that’s positive or negative.

Sometimes we have great conversations with clients where we can tell them they can have everything they want and more – in terms of timescales and cash. Other times we have to have conversations where the client is going to have to change something – or accept the consequences.

All the clients I’ve ever seen would rather understand their situation than leave things for a few years only to hear that they should have changed earlier.

So if this is playing on your mind, have a chat with us. We’ll be able to break down your situation. It is complicated – I can’t tell you it isn’t. But that’s what we’re here for. We’re boring people that read pension documents all day!

So just reach out and sit down with somebody that can take the time to talk you through your plans. You might even find you’re closer to where you need to be than you thought.

The value of pensions & investments and any income from them can fall as well as rise. You may not get back the amount originally invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Tax treatment varies according to individual circumstances and is subject to change.

A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action. If you are considering releasing equity from your home, you should consider all options available before equity release.

The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution. As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.

Although the final decision is yours, you are encouraged to discuss your plans with your family and beneficiaries, as a Lifetime Mortgage could have an impact on any potential inheritance. We would also encourage you to invite them to join any meetings with your Financial Adviser so they can ask questions and join in the decision, as we believe it is better to discuss your decision with them before you go ahead. This is a referral service.