Pension guide

1. A simple guide to pensions
STATE PENSION
A pension is a long term, tax-free savings plan that can enable you to live in financial comfort in your older years.
While you might get a state pension from the government, this will only cover basic living expenses.
We explain what pensions are and how to achieve the lifestyle you want in retirement.
In this guide:
1. Why use a pension?
2. Types of pension
3. What are the pension rules?
4. What is tax relief?
5. How much do I need per year in retirement?
6. When is the current retirement age?
7. How to make your pension stretch

2. 1. Why use a pension?
A pension is like a turbo-charged savings account because the money is invested for
the long term.
There are three main benefits to pensions:
Tax relief
You essentially get free cash with a pension in the form of tax relief from the
government.
The rate of tax relief ranges from 20% to 45% depending on how much you earn:
• Basic rate taxpayers get a £20 top-up for every £80 they put into a pension
• Higher rate taxpayers will get a £40 top-up for every £60 they put in
• Additional rate taxpayers get a £45 top-up for every £55 they put in

3. 2. Employer contributions
With workplace pension schemes, your boss has to put in at least 3% of your
“qualifying earnings” into your pot, but some may choose to contribute more.
For example, if you pay in 5% of your salary as your pension contribution, your
employer might match it and pay 5% too.
This is a bit like getting a pay rise, just delayed until your 55th birthday.
You will often join these schemes on an auto-enrolment basis with a new job, but
you can find out about the specifics by speaking to your employer.

4. 3. Tax-free lump sum
The third perk is that when you come to take money out of your pension, 25% of it
can be as a tax-free lump sum. So a quarter of your life savings will be safe from the
taxman.
Many people use the lump sum to pay for home improvements or book the holiday
of a lifetime.
However, bear in mind that if you withdraw your pension in small chunks, 25% of
each chunk will be tax free. This is a great way to make your pension stretch, as we
explain in the final chapter of this guide.
Types of pension
There are broadly three types of pension: the state pension, final salary schemes
and defined contribution products.

5. 1. The state pension
This is paid to you by the government when you reach state pension age, which is currently 66. This will
rise to 67 by 2028.
From April 2022, the full new state pension is £185.15 a week. The basic state pension is £141.85 a week.
However, the amount you receive is based on your national insurance record. This is essentially the
number of years you worked, received national insurance credits, or paid voluntary national insurance
contributions.
How many years do I need for a full state pension?
You need to have 35 years on your national insurance record to be eligible for a full new state pension.
Read our guide on the state pension.
You can look at retirement as a kind of meal with several courses.
Think of the state pension as a starter; don’t rely on it or you will still be hungry. Even if you receive the
full new state pension, it only works out at £9,628 a year.
The state pension usually increases each year according to what’s known as the triple lock guarantee.
However, the triple lock has been suspended for the 2022/23 tax year. We explain more here.
Friends sharing a meal in a restaurant
Pensions are a bit like a three-course meal: make sure you save enough to keep you full in retirement

6. 2. The old-fashioned final salary scheme
The final salary pension (also known as defined benefit pension) is a bit of a dinosaur.
These workplace schemes promise to pay you a fixed income when you retire, regardless of how the
investments within the scheme actually performed.
The retirement income is usually based on:
• The length of time you worked at the company
• Your salary
• Inflation (based on the retail price index measure)
Final salary schemes are rare these days and are very expensive for companies to run.
They are so generous that you can think of them like all-you-can-eat buffets, with lucky diners tucking into
a tremendous feast.