A pension is a tax-efficient way to save and save money over time for when you plan to cut down on your working hours or stop working entirely later in life. In the future, laws and tax will change and for these reasons, its value will go up and down, and it might be worth less than what was paid in.
Your personal circumstances, as well as where you live in the UK, will have an effect on how you are taxed. When you retire, you will receive this form of income. The amount you receive is determined by how much you put into your pension fund during your working years.
Types of pension
When you save money for life after you quit working, you can come across a few different types of pension plans:
1. Pension from the employer: You will also be included in a defined benefit pension plan by your employer. Your monthly income will be used to contribute to your pension. Payments will be calculated differently depending on the type of pension. Your employer may also enrol you in a defined benefit pension plan. This is often referred to as a final salary pension. Your employer will contribute, and you will receive tax cuts on your contributions.
- Final salary pension- A final salary pension is similar to a corporate pension, except the amount you receive in retirement is determined by your salary, and you will be paid a fixed amount per year.
2. Pension from the state: When people of the United Kingdom meet the State Pension age, they will receive this pension from the government. Your eligibility for the full State Pension is determined by your national insurance records.
- New state pension-The state pays a new state pension to those who meet the age of state pension after April 6, 2016. You'll need 35 years of national insurance payments to receive the full bonus of £179.58 a week. To be qualified, you must have paid into the national insurance system for at least ten years.
- Basic state pension - If you turned 65 on or before April 1, 2016, you can receive the basic state pension. You'll need 30 years of national insurance payments to get the full sum, which is £137.60 a week. If you receive the basic state pension, you may be eligible for a supplement from the additional or second state pension. Many who have accrued national insurance payments under both the basic and current state pension systems will be eligible for a combination of the two.
3. Personal Pension (Self-Invested) (SIPP): This is a self-directed defined benefit pension that you can open and contribute to. These forms of pensions, as well as occupational pension and state pension, are available.
When do I have to start paying taxes on my pension?
The annual contribution is the maximum sum you can put into your pension in a calendar year before being taxed. It includes all of your retirement accounts, including personal, employer, and final salary plans. It is currently set at £40,000 a year and will remain unchanged for the tax year 2021/2022.
Allowance for a lifetime pension
The lifetime allowance is the maximum sum you can put into your pension without paying additional taxes on top of your annual tax.
The total allowance is £1,073,100, and it was supposed to increase in line with inflation, but it has been frozen until April 2026.
For the next five years, you will not be taxed on your pension on sums up to the annual mark.
Although there are a variety of ways to save and prepare for retirement, a pension offers a number of advantages when it comes to saving for the golden years. If you have any further questions or would like a consultation, please email Persona Finance (enquiries@personafinance.co.uk).
