Pension Raid?
- BetterAskAdam.com
- Sep 28, 2024
- 6 min read
How saving in a pension can get you free money, what might happen in the budget of 2024 to claw it back. So here is a simple guide to how pensions work and what some people are doing to safeguard their benefits, in case things change in the budget.
Basics
There are 3 main types of pension: State Pension, Private Pension & Company Pension.
State Pension
Q: What is the state pension?
A: The State Pension is provided by the government. You get a State Pension when you reach State Pension age, which is currently 66. It is scheduled to rise to 67 between 2026 and 2028, although things may change.
You don't have to be retired to get the state pension, so you can still be working.
In the current tax year (2024/25), the State Pension is £221.20 a week for a single person.
You can check your State Pension here
Relevant to some people - State Second Pension
If you were employed and in your employer’s workplace pension scheme before April 2016, you may have been contracted out of the State Second Pension and/or the State Earnings Related Pension Scheme. This means that you may be entitled to additional State Pension from that employer’s scheme. It has not been possible to contract out since April 2016.
Q: Do I just have to be 66 to get my State Pension?
You’ll need 10 qualifying years on your National Insurance record to get any new State Pension.
A qualifying year is one in which you were:
working and made National Insurance contributions
getting National Insurance credits for example if you were unemployed, ill or a parent or carer
paying voluntary National Insurance contributions
To get the full state pension, you need to make 35 years worth of qualifying contributions.
If you haven't got enough qualifying years, it might be possible to 'buy' extra years. However that is not always a good thing to do and you should take advice before doing anything. More details here.
Q: Is the state pension taxed?
A: Yes, the amount you get goes towards your income and that is taxed like any other kind of income.
For 2024/25, the Standard Personal Allowance is £12,570. This means that you can earn or receive up to £12,570 and not pay any tax. The full state pension is worth £11,502.40 a year. So if that is the only income you have, you will probably not have to pay tax. But if you earn anything else, you may start getting taxed.
Private Pension
Q: What is a private pension?
A: A private pension is a way of saving for your retirement. What makes them special is that you get money back from the government - hence the idea that you get 'free' money.
A basic rate tax payer (20%) only needs to put in £80 into a pension to get £100, the government adds in the rest. If you pay tax at higher rates, you can get even more tax back. Higher-rate taxpayers (40%) only need to pay in £60 to get £100 into their pensions and additional-rate (45%) taxpayers only need to £55 to get £100 into their pension.
That can make private pensions, very attractive ways of saving money.
Q: When can I start taking money out of my private pension?
A: You can normally start taking your pension savings any time after age 55 – even if you’re still working. This will increase to age 57 from 6 April 2028. You can choose to -
Take it as cash – you can normally take up to 25% of your pension savings tax free. The other 75% is taxable.
Flexible access to your pension pot – take the income you need, when you need it. This is also called 'income drawdown'
Buy a secure income – enjoy a guaranteed regular income for the rest of your life. This is also called an annuity.
Q: Isn't it a great idea to buy a secure income for the rest of my life with an annuity?
A: It can certainly be attractive to swap your pension savings for an annuity which will pay a set amount for the rest of your life.
But there are drawbacks.
One of the major ones is that an annuity can’t be inherited on your death. The point is that it dies with you.
If you don't buy an annuity but just take money out of your fund to live off, any unspent funds can be passed on tax-free to your beneficiaries when you die.
However, the fund value will rise and fall alongside the value of your pension investments, so in those terms it is more risky to leave it in the pension pot.
Q: Can I have both an annuity and drawdown?
A: Yes - you can have both and the combination of the two may provide you with the right balance of flexibility and security that you need. Always take advice.
Q: So what might happen in the 2024 budget and why is everyone getting so worried?
A: Most people can currently pay the lower of £60,000 or their full salary into their pension pot every year and get the tax back, so getting 20%,40% or 45% on top of what they contribute.
1: However, the Chancellor is expected to target pensions in her first budget may cut the benefit people receive. One idea is that there would be a 30% flat rate of relief. That means lower income savers would actually be better off, while higher income savers would be worse off.
For that reason, lots of people have ben chucking in as much money as they can before the budget to get the full tax top-up in case it is reduced.
At the moment you can put in a maximum of £60,000 a year into your private pension. The Chancellor might reduce this amount or limit the tax advantage to a lower sum. As a result lots of people seem to be making sure they have used their maximum allowance for the year, before the budget, perhaps bringing forward their contribution for the whole year, to before the budget.
The investment platform, Interactive Investor, said that customers contributing the £60,000 maximum into their self-managed pension pots had jumped by 64% since the start of the current tax year in April, compared to the same period in 2023.
2: Interactive Investor also said that it saw a 58% increase in the volume of tax-free cash withdrawals from self-invested personal pensions (SIPPs) since September 1st compared to the same period last year.
You are currently allowed to take up to 25% of your pension as a tax-free lump-sum up to a maximum of £268,275. There is talk that the Chancellor might cut this allowance to £100,000. So some people have taken the cash, whilst it remains tax-free.
There is a problem with this, as what do you do with the money once oyu have taken it out - as now you have to find an alternative investment home for it.
3: For those who make contributions through their own company, there might not be an immediately obvious advantage to making bigger pension contributions now because the company contribution doesn't get the same tax benefit as as inidividuals contribution. That's because it is made from pre-tax profits. It is a cost to the business and therefiorecomes off the revenue before profit and tax is calculated. However, it is conceivable that the Chancellor changes the rules, so that company contributions to a pension are seen as a benefit-in-kind, much like a company car is seen. If that were the case, then inidividuals might be taxed on the pension contributions made by their company. So there might be a reason to make the pension contribtion before the budget.
Company Pension
Company or Workplace pension
A workplace pension is set up by your employer. If you choose to pay into your pension, your employer will too.
Workplace pensions fall under two categories – Defined Contribution (DC) and Defined Benefit (DB)
A Defined Contribution pension plan is invested and if your investments perform poorly, you could get back less than what you started with.
A Defined Benefit scheme is a type of pension where your employer promises to pay you a set amount of income when you retire.
As with everything on the site, this is just my best efforts as a journalist guide to what consider and you should consider taking advice whenever dealing with your finances.
I personally find the Royal London guides to pensions very good and you might want to have a look here
We are looking at the issue of pensions on Times Radio Money Matters and if you have a question or point you would like to rise - please contact me here or on X by following me @adamshawbiz