Pensions are cool – no, honestly!


Jonathan Young

Jonathan Young

Financial Planning Support


Before I worked in financial planning and wealth management, I used to work in pensions and when asked about my job the mere mention of pensions was normally enough to kill the conversation dead.

Maligned as either boring or misunderstood, the general public at large, seemingly, has no interest in chatting about pensions but when the World Economic Forum (WEF) states that we’re sitting on a pension ‘Timebomb!’, we maybe should get a bit more interested.

The WEF has forecast that the gap between what people have saved for retirement, and what they will actually need, will reach $420 trillion (or a mere £23 trillion in the U.K.) by 2050.

These stark figures and bombastic statements of timebombs from economists should be sparking a response but so far it hasn’t gained traction and I think I know the reason – we need a Greta!

Pensions need their very own Greta Thunberg to rally behind them! But with no obvious volunteers to be the Greta Thunberg of pensions, maybe a different tact would be to give you some ‘cool’ facts about pensions.

Cool fact number 1: The Government gives you money

Tax-relief in pensions is complex and there’s annual allowances, tapering to that annual allowance, threshold income, adjusted income, net pay arrangements, relief at source, salary sacrifice and relief that is reclaimable via self-assessment. However, in our quickfire cool facts I’ll just look at a very basic scenario in which you could effectively get money from the government for nothing.

If you, as a parent or grandparent, want to plan for your child’s long-term future, you could set up a personal pension and could contribute up to £2,880 into this pension for the child/grandchild in the 2020/21 tax year, HMRC will automatically add £720 to that contribution. It won’t affect your pension contribution amounts or your personal tax and you can do it every year.

If you did this for twenty years for a child/grandchild, they could have £72,000 in their pension pots (before investment growth) by age 20 and HMRC will have given £14,400 of that to you.

Cool fact number 2: No Tax (caveat - there is definitely still tax)

My click-bait inspired fact number two of ‘No tax’, isn’t entirely true. 75% of any income withdrawn from pensions up to an overall limit (known as the Lifetime Allowance) is taxable, above the overall limit the tax gets even more punitive with possible tax charges of up to 58.75% for an additional rate taxpayer.

However, whilst invested, your investments grow virtually tax-free. Whereas, unwrapped investments suffer from both income tax and capital gains during your lifetime, not the humble pension, which suffers virtually no income tax or capital gains tax during your lifetime.

Probably more importantly, they don’t suffer from any Inheritance Tax (IHT) if written in trust. Almost all of your worldly possessions will fall within your estate and those above your nil-rate band will be subject to IHT at 40%. Not your pension. It can pass to whomever you want, straight away and not be subject to IHT.

Cool fact number 3: Government’s pension tracing service

I pretty regularly hear from clients, friends and family that they’re ‘sure they have a pension from an old work but haven’t a clue how to find it’. Never fear, the Government has a website where you can type in the name of any old employer and it will tell you who currently administers the pension scheme for that employer.

A couple of quick emails, letters or phone calls and you can track down any pension schemes you may have from previous employments. These can be consolidated into your current workplace pension scheme or a private arrangement if you would prefer.

I recently took a family friend who was about to retire through this exact process and he had an old defined benefit pension that was worth about £225,000 on the open market – he didn’t know he had it!

Cool fact number 4: Contribution limits

If you have the relevant earnings, you can add up to £40,000 every year into your pensions. Completely relieve these holdings of tax and let them grow in a tax-efficient wrapper for future use.

This is double the limit permittable for Individual Savings Accounts (ISAs).

What’s more, if your earnings are sufficient, you can carry forward previous year’s annual allowances and, in certain circumstances, you could contribute up to £160,000 in one tax year.

Cool fact number 5: Employer contributions

Another, pretty common, mistake with pensions is being unaware of employers matching pension contributions up to a certain limit. Quite often your employer will set out a term in your employment that for every x% you contribute, they will match or double up to a certain limit.

If you can live without that additional percentage in your pay packet, then you could be missing out on additional money from your employer by not maximising your pension contributions.

Cool fact number 6: Reduce your tax

Whilst not as punchy as my ‘No tax’ headline, reducing your tax is probably most relevant for self-employed and company owners.

If you pay income tax via self-assessment (such as a self-employed individual), you could contribute into a pension scheme up to a potential maximum of £160,000 (with carry forward) and not pay any income tax on that amount. This is particularly important for those in the £100,000 to £125,000 earnings range where you not only get the 41% income tax saving, it reduces your earnings so you regain the personal allowance which results in a further saving of 20%, resulting in a total tax saving of 61%.

For company owners looking to take out profit from their company, it works in a similar way. If you were to withdraw the profit via dividend, first you would pay corporation tax on that profit and then further income tax on the dividend payment. Alternatively, you could make an employer contribution to a pension scheme, which is an allowable expense for corporation tax and you’re not taxed on the profit until you withdraw it from the pension (25% of which will be tax-free).

Cool fact number 7: You can access them however you want

Since Pensions Freedom came into effect on the 6th April 2015 how you access your pension has completely changed. The list of options is long and full of jargon that probably causes more confusion than it does good.

In simple terms, you can take it however you want. You can buy a guaranteed income for life that pays out a little bit every year for the rest of your life or you can take a big lump sum and have that holiday you always wanted. It really is up to you.

However, this cool fact comes with a very large warning. Great care should be taken to make sure any amount withdrawn is sustainable over the long-term, spending too much early on could see you facing a shortfall when you are older and at your most vulnerable.

And there you go, that’s my list of (questionably) cool facts about pensions.

Contact us

If you’d like to get in touch to talk about anything raised, such as consolidating your pensions, whether you could contribute more to your pension, finding the right investment strategy for your pensions and/or making sure your income strategy is sustainable, please get in touch with me or your usual Johnston Carmichael Wealth adviser.

Please note, pensions are long term investments and cannot usually be accessed until age 55 (age 57 from 2028). Any income from a pension over and above any tax-free allowance, will be taxed at your marginal rate. Investments within pensions can go down as well as up and you may not get back the full amount invested. Pension legislation including the tax aspects can and may change in the future.