Do I have to join a pension scheme?
This short guide aims to give you some 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.
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.
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? on the LITRG website.
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 on the LITRG website explains how the state pension is taxed.
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.
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.
Most 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.
There is more information on auto-enrolment in the employment section of the website.
Please see our separate page on the main LITRG website: Do you know how tax relief on your pension contributions works?
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 GOV.UK.
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.
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 on the LITRG website. As there is a lot to think about, we suggest you read that guide in full before taking action.
Pensions are complicated – there is further information on the LITRG website. If you need detailed advice, 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 has launched 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 guide 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.