Understanding Pensions and Making Wise Investments

Are you curious about understanding the different pension options available to you and securing your financial future?

In a nutshell, a pension is a savings pot into which you save money during your working life to draw upon in retirement. Various types of pensions come with their own characteristics.

Benefits of Investing in a Pension

Tax Relief: Pension contributions made from earnings qualify for tax relief at your highest marginal rate. This means the government tops up the amount paid into your pension and may give you a tax refund on top too. The total benefit could be as high as 60%. Typically, total contributions are capped at £60,000 per year per person.

• Tax-Free Growth: Any income or capital gains within a pension are not subject to UK tax. Therefore, you don’t need to declare them on your tax return.
• Inheritance Benefits: Pensions are usually exempt from UK inheritance tax as they do not form part of your estate. If your pension still has money in it when you die, you can pass it to your spouse, future generations or anyone else you choose.
• Impulse Spending Protection: The money in your pension cannot currently be accessed until you are at least 55 years old, rising to 57 from 2028 onwards, protecting your savings from impulse spending.

 

Workplace Pensions

A workplace pension scheme allows you to save for retirement through contributions deducted directly from your salary. Your employer arranges the pension and must contribute alongside you, if you are eligible for automatic enrolment. You also receive tax relief on your contributions.

• Default Funds: If your workplace pension is invested in a default fund, ongoing charges are capped at a maximum of 0.75% per year. Default funds may offer a suitable investment strategy for those who cannot or do not want to make their own investment decisions.
• Contribution Flexibility: As a member of a workplace pension, you must make the minimum monthly contributions set by the scheme, with limited flexibility to stop and restart contributions.
• Automatic Enrolment: Introduced in 2012, automatic enrolment means you become a member of your employer’s workplace pension scheme by default, though you can opt out if desired.

 

Stakeholder Pensions

Stakeholder pensions can be a simple option if you do not have a workplace pension. Introduced to encourage long-term retirement savings, they offer:

• Low Minimum Contributions: As low as £20 per month. You have the flexibility to stop and start payments, and the ability to make one-off lump-sum contributions.
• Capped Charges: Annual costs are capped at 1.5% for the first 10 years and 1.0% thereafter. Whilst relatively cheap and easy to set up, they often provide limited investment fund choice and retirement benefit options.

Personal Pensions

Personal pensions are similar to stakeholder pensions but generally offer a wider range of investment fund and retirement benefit options.

• Contribution Flexibility: You can stop and start contributions and make lump sum payments, with a slightly higher minimum contribution of £30-£50 per month.
• No Cap on Charges: Unlike stakeholder pensions, personal pensions have no cap on charges, which can lead to higher ongoing costs depending on the fund investment fund options chosen.

 

Self-Invested Personal Pension (SIPP)

A SIPP is an alternative type of personal pension offering a broader range of investment options.

• Flexible Investments: As well as investment funds, you can invest in direct equities and commercial property as well as fixed-rate cash deposit accounts.
• Higher Costs: SIPPs generally have fixed set-up fees and additional charges for administration at retirement, but the broadened investment options can potentially lead to greater pension fund growth.

 

Small Self-Administered Scheme (SSAS)

A SSAS is a trust-based occupational pension usually set up by directors of limited companies for specific employees. They may suit groups running a common business and wishing to have full control of their pension fund.

• Cost Efficiency: Depending on the number of members, the cost per member can be lower than individual SIPPs.
• Investment Control: Trustees (usually company directors) invest the funds as appropriate. Investment options are similar to those within a SIPP.

 

Next Steps

Are you considering a pension or reviewing your current pensions? Contact us to explore your options and secure your retirement.

Important Information

The above information is for educational purposes and is not a personal recommendation or investment advice. Content is accurate at time of writing. Tax limits and pension regulations may change. Wise Investment is authorised and regulated by the Financial Conduct Authority (FCA 230553). Wise Investment is not authorised to provide advice on defined benefit pension transfers.