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5 lessons from the past to help you make the most of your pension in the future

A look at how the pension landscape has changed over the years and how to use past lessons to make the most of your pension in the future.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Leave the past behind you, but take important lessons on with you.

That’s what they say. And that’s true when it comes to pensions and retirement planning too.

Pension rules can seem complicated, and legislation has changed dramatically over the years. At times it might have seemed hard to keep up, but it’s important you do. Understanding how pensions work, and the tax benefits in particular, could lead to an earlier, and happier retirement.

We look back over some significant changes and common past mistakes, offering tips along the way to help you avoid the same pitfalls in the future.

This isn’t personal advice. If you’re not sure if a certain action is right for you, ask for financial advice. All information in this article is correct as at 20 October 2021. Remember, pension and tax rules can change, and benefits depend on your circumstances.

Lesson 1 – don’t underestimate how much you need to save

The retirement landscape has changed a lot. Those born in the 70s, 80s and later will need to save a lot more than their parents or grandparents to enjoy the same level of wealth in retirement.

Going back 30 years or more, final salary or defined benefit pensions were the norm. They offer a secure income for life, which typically pays you an average of your salary every year. Today, they’re like gold dust.

Nowadays the most common type of pension is a defined contribution pension. You pay into a pot and the money can be invested. What you get at retirement depends on how much you’ve saved and how well your investments perform.

So how much do you need to save?

We all have dreams about what our retirement might look like. Yet the majority of people don’t know what level of income they’ll need to survive without working, or how much they need to save to make sure that’s covered.

In fact, only 20% of savers are confident they’re saving enough for retirement.

To help simplify things, the Pensions and Lifetime Savings Association (PLSA) launched national income and living standards, designed to help people picture what lifestyle they want in the future.

Living standard Yearly income
Single Couple
Minimum (Covers all your needs, with some left over for fun) £10,900 £16,700
Moderate (More financial security and flexibility) £20,800 £30,600
Comfortable (More financial freedom and some luxuries) £33,600 £49,700

Source: Retirement Living Standards by the Pensions and Lifetime Savings Association and Loughborough University, October 2021. The yearly income figures are higher than shown for those living in London.

Remember, everyone’s financial circumstances are different, and these figures are just a guide.

Once you’ve decided how much income you might need or want in retirement, it’s a good idea to check if your pension is on track to reach your goals. Our calculator will show you how much your pension could pay in the future. You just need to confirm a few details about yourself and your pension.

Try our pension calculator

Lesson 2 – don’t miss the opportunity to cut your tax bill

When you pay into a pension, you can get a top up from the government in the form of tax relief – slicing down your tax bill. But the government can make changes to both pension and tax rules at any time.

Back in 2007/08, the basic tax rate was 22%. This meant that when you paid money into a pension, you got 22% in basic-rate tax relief which was added into your pension. For every £8,000 you added, the government would add £2,256.

In 2008 basic-rate tax was lowered to 20%, meaning you’d get £256 less in basic-rate tax relief for every £8,000 you paid in. Similarly, for additional-rate taxpayers the rate changed from 50% to 45% in 2013/14, meaning pension savers could claim back 5% less in tax relief.

Across a working lifetime, not taking full advantage of the tax breaks available each year could add up to thousands of pounds in missed ‘free money’ from the government.

If you can afford to, we think it makes sense to make the most of your current pension and tax relief allowances every year. Certain limits apply. The tax benefits of the rules and allowances will depend on your circumstances.

Find out more about pension tax relief

Find out more about pension contribution limits and allowances

Lesson 3 – don’t forget about your rights to a workplace pension

In 2012 the government introduced auto enrolment to help more people save for retirement. Under these rules, all UK companies, irrespective of their size, have to provide a pension to their eligible employees and contribute to it on their behalf. The minimum pension contribution is currently 8% of your qualifying earnings – employers must pay at least 3% and you pay the remaining 5%.

Some private sector workers aren’t taking advantage of this legislation at all, and many more are contributing just the bare minimum. This means they could be missing out on extra pension contributions from their employer, especially as some employers will pay in more if you do. If you have a workplace pension, it’s worth speaking to your employer about paying in more. Remember though, your pension is for your retirement. Any money you pay in isn’t usually accessible until at least age 55 (rising to 57 in 2028).

Lesson 4 – don’t forget to use unused pension allowances

In 2011 the chancellor introduced a rule called ‘carry forward’. If you’re a higher earner and have capital available, this needs your full attention.

This rule lets you take advantage of any unused allowances from the previous three tax years. This gives you the opportunity to potentially shelter more money from tax, outside the usual annual limits.

Let’s say the annual allowance was £40,000 for the previous three tax years. The carry forward rule means you could invest up to an extra £120,000 in your pension (depending on how much of that you’ve used so far). If you hadn’t made any pension contributions in the last three years, you’d be able to pay in up to £96,000 into your pension, with the government adding £24,000 in basic-rate tax relief. If you’d paid additional-rate tax on all of it, you’d also be entitled to £30,000 further tax relief outside of the pension.

To use the carry forward rule, you need two things:

  1. You must have had a pension in each year you wish to carry forward from, regardless of whether you contributed into it in that year (the State Pension doesn’t count).
  2. You need earnings of at least the total amount you plan to contribute this tax year. Alternatively, your employer could contribute to your pension.

Try our carry forward calculator

Lesson 5 – don’t misunderstand pension freedoms

Pension freedoms were one of the most dramatic and impactful changes in pension history. These rules were introduced in 2015 and gave people more flexibility in how they access pensions. Before this, lots of people felt they had little choice but to swap their pension for a guaranteed income for life (an annuity).

Since this rule was introduced, we’ve seen a shift towards flexibility and freedom, as more people are choosing to take a flexible income.

The flexible rules mean most people over 55 (rising to 57 in 2028) can choose to move their personal pension into flexible drawdown or take lump sum withdrawals (UFPLS). Both options let you choose how much of your pension to access at any one time, keep your pension invested and take control of the income you withdraw. But they work in different ways and can have different tax implications too.

With flexible drawdown, you can usually take up to 25% of whatever you choose to move into drawdown as a tax-free lump sum – this could be your entire pension in one go, or a little at a time depending on your needs. You can then decide how much taxable income to take as and when you need it (once you give up work completely for example). Anything you don’t withdraw is invested as you choose.

If your chosen provider, like HL, offers UFPLS and you choose to access your pension this way, your money doesn’t move. The lump sum withdrawal is made directly from your existing pot. Unlike drawdown, at least 75% of every withdrawal you make will usually be taxable and the rest tax free. You decide how to invest anything left in your pension and can make more lump sum withdrawals in the future.

With both flexible options, any taxable income you withdraw will be added to any other taxable income you’ve received in that same tax year. So making large withdrawals could bump you up into a higher tax bracket if you don’t plan properly.

They also don’t come without their risks. Unlike other options like an annuity (which offers a secure income for life), drawdown and making lump sum withdrawals means your income isn’t secure. If your investments don’t perform as you’d hoped, you could get back less than you invest or, in the worst case, run out of money completely. If you withdraw too much too soon, you also run the risk of running out of money in retirement.

Because of these risks, it’s important to make sure you have enough secure income to fall back on if things don’t go to plan. If you don’t have a secure income in place, you should consider whether buying an annuity would be a good option.

Taking lump sums can also trigger limits to how much you’ll be able to save into pensions in the future. It’s vital to consider if these options are right for you, especially if you’re still earning and saving.

Whatever you decide to do with your pension, it’s an important decision. Keeping your pension invested offers flexibility and the potential for growth. But remember, all investments can rise and fall in value, so you could get back less than you put it.

The government's free impartial Pension Wise service could help.

Discover the HL Self-Invested Personal Pension (SIPP)


Explore our Investment Times autumn 2021 edition for more articles like this.

See all articles

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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