Do I have to join a pension scheme?
This short guide aims to give you some basic information on pensions and pension schemes.
Pensions are a way of helping you to save up to pay for your living costs during retirement.
The UK Government gives 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 some part of the pension as a tax-free lump sum.
The Government pays the basic state pension as a regular payment to eligible people who reached state pension age before 6 April 2016. You can use the ‘State Pension calculator’ on GOV.UK to work out when you will reach state pension age. If you reach state pension age on or after 6 April 2016, you must claim the new state pension.
You must have paid enough National Insurance contributions (‘NIC’) or been credited with them in order to qualify to receive the basic state pension. 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.
The basic state pension is taxable, but it is paid gross, that is, with no tax taken off before you get it. If your income including your basic state pension is less than your tax allowances, you will probably not need to pay any tax. If your taxable income, including your basic state pension and any other pensions, is more than your tax allowances, you may need to pay some tax.
The maximum basic state pension is currently £125.95 per week. You need a minimum number of 'qualifying years' of NIC payments or credits to qualify for the full basic state pension. You need a minimum of 30 years.
If you have paid NIC for fewer than the minimum number of years you need when you reach state pension age, your pension will be less than the maximum basic state pension or you may not get anything at all, depending on how many qualifying years you have.
The amount of basic state pension you receive depends on the number of years you paid National Insurance contributions or were credited with National Insurance.
Each qualifying year gives you some state pension – 1/30 of the full basic pension amount. For example, if you have 15 qualifying years, you get 15/30 (50%) of the full amount.
If you reach state pension age on or after 6 April 2016 there will be a flat-rate state pension, 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 reached your state pension age before 6 April 2016, you will keep your entitlement to the basic state pension, in line with the existing rules.
If you reach state pension age after 5 April 2016, you will get the new state pension. To get the full pension, you will need 35 qualifying years of NIC or NI credits. If you have fewer 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.
The full new state pension is £164.35 per week for 2018/19.
You can find out more about the new state pension system on GOV.UK.
How is the state pension age changing?
The state pension age is in the process of increasing to 66 for everyone. You can use the ‘State Pension calculator’ on GOV.UK to find out when you will reach state pension age under the current law.
Note that the state pension age will increase to 67 between 2026 and 2028, and to 68 between 2037 and 2039.
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.
Employers are joining the scheme between 2012 and 2018, and so employees will gradually be phased in.
There is more information on auto-enrolment in the ‘Employed' section of the website.
Providing your pension scheme provider agrees, there is no limit on the amount you can put into your pension. The tax relief you can get may be limited, however, and you should remember that once your money has been saved into a pension there are rules on how much you can take out and when you can take it. Heavy penalties can apply if you break these rules though from 6 April 2015 for personal pensions, these penalties mainly arise only if you try to cash in your pension too early.
You can save in more than one pension scheme at the same time, for example, in both a personal pension and an occupational pension.
What tax relief do I get on pension contributions?
You can get tax relief on contributions of up to 100% of your UK earnings, if you are a UK taxpayer, subject to the ‘annual allowance’, which is explained below.
If you do not have any earned income or are a non-taxpayer, every £100 of contributions you make will receive a contribution of £25 from HMRC up to a maximum of £3,600 per tax year. This means your maximum net contribution, before the addition of tax relief, is £2,880.
For every £100 you want to put into your pension you only actually need to pay £80 out of your income after tax – the Government pays the remaining £20.
If you pay tax at the 40% higher rate or the 45% additional rate you will also be able to claim an extra 20% or 25% tax relief. You can claim the difference through your self assessment tax return or by making a claim to HMRC by telephone or letter. This is also how you claim relief if you do not get tax relief at source on your pension contributions (for instance, if you pay into a retirement annuity scheme).
If you are a Scottish taxpayer, see our section on Scottish income tax for information on tax relief on your pension contributions.
You are paying £50 per month (£600 each year) to your pension provider. That is treated as being net of basic rate tax. So your pension provider claims back £150 from HM Revenue & Customs (HMRC), meaning that the total amount going into your pension scheme is £750 per year. (You can check that basic rate tax on £750 is £150 - that is £750 @20%).
Example of relief for higher rate taxpayers
This example shows how relief works for higher rate taxpayers if you pay £50 a month into a personal pension. You will see from the example above that you obtain basic rate tax relief at source, so your gross payment is £750 each year.
In your tax calculation, you then assume that more income is taxed at basic rate – that is, you add the gross pension payment to your basic rate tax band.
If your total income for the year is £50,000, your income tax liability for 2018/19 would be calculated in these two ways, depending on whether or not you had paid £600 net (£750 gross) personal pension contributions (PPC):
No PPC PPC
Total income £50,000 £50,000
Personal allowance £11,850 £11,850
Taxable income £38,150 £38,150
£34,500 @ 20% £6,900
£35,250 @20% £7,050
£3,650 @40% £1,460
£2,900 @40% £1,160
Total tax due £8,360 £8,210
You will see that you have obtained a further £150 of tax relief via the second calculation in addition to the £150 tax relief you obtained by paying your contributions net of basic rate tax. So in total you have received tax relief of £300 i.e. 40% tax relief on your pension contribution of £750.
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 (2018/19). 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 pension, the annual allowance drops to £4,000.
There is more information on the annual allowance on the GOV.UK website.
There is also a lifetime allowance (LTA), which has been set at £1,030,000 for 2018/19. (It was £1 million for 2017/18). 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.
There is more information on the lifetime allowance on the GOV.UK website.
When can I get the state pension?
The earliest you can get the basic state pension or the new state pension is when you reach the state pension age.
You can find out when you will reach the state pension age by using the ‘state pension calculator’ on the GOV.UK website.
But you can also choose not to claim your state pension immediately and ‘defer’ it. If you reached state pension age before 6 April 2016, the old state pension rules allowed you to defer then later take either a higher income or a lump sum, depending on how long you left it before claiming. The new state pension rules for those retiring on or after 6 April 2016 only allow you to take a higher income when you stop deferring – you cannot take a lump sum. There is further guidance on state pension deferral on the LITRG website.
When can I get my personal pension?
We give detailed information on when and how you can take money out of your personal pension in our ‘Pensioner’ section 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.
The ‘State Pension calculator’ on GOV.UK can tell you when you will reach state pension age.
There is more information about the new state pension on GOV.UK.
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.