This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Pensions are highly effective for retirement planning. They can offer generous tax breaks (such as tax relief on contributions), significantly boosting a nest egg’s growth over time. However, pensions can also be confusing.
Not only do different types of pensions exist, but the rules and processes can vary across different schemes. Below, our Burnley financial advisers offer a short guide to pensions in 2024-25, how they work and ideas for integrating them into a wider retirement plan.
We hope these insights are helpful to you. Please get in touch for more information or to discuss your own financial plan with us.
The State Pension
There are three main types of pension in the UK: the State Pension, defined contribution pensions and final salary (or “defined benefit” pensions). The first is an income from the government, which an individual can claim after reaching their State Pension age (66 in 2024).
The full new State Pension is £221.20 a week in 2024-25 (£11,502.4 per year). To achieve this, an individual must have at least 35 “qualifying years” on their National Insurance (NI) record. To receive any income at all, least ten years`must be accumulated.
The State Pension increases each year under the “triple lock” system (by at least 2.5%), and continues indefinitely until the individual’s death. This makes the State Pension incredibly valuable. Indeed, for many retired people, it is the cornerstone of their retirement plan.
A financial adviser can help you achieve the best State Pension deal. Some clients will naturally accumulate 35 qualifying NI years simply by working (an employee makes NI contributions automatically via their paycheque). Others may need to explore other options, such as making voluntary NI contributions to complete their record before retirement.
Defined contribution pensions
Sometimes called pension “pots”, defined contribution pensions involve building up dedicated retirement savings under special UK pension rules. These pensions can be opened privately (e.g. a “SIPP”, or self-invested personal pension), or your employer may offer one.
These pensions are commonly found in the UK private sector. Under auto enrolment rules, employees must opt into their workplace scheme and contribute at least 5% of their salary. Employers are required to contribute 3%, totaling 8%.
One powerful feature of defined contribution pensions is tax relief. In 2024-25, a Basic Rate taxpayer gets 20% relief. This means that the 20% they would have paid in tax (had they simply taken the money as salary) goes to their pension. For a higher rate taxpayer, the relief is even better at 40%.
All capital gains, interest and dividends generated within these pensions are also tax-free. Moreover, when the pension owner eventually dies, any money left over inside the fund is inherited by beneficiaries without inheritance tax (IHT).
Final salary pensions
Sometimes called “gold-plated pensions” for their attractive benefits, final salary pensions (or “defined benefit” pensions) are increasingly rare in 2024. However, they are still used in many public sector roles – e.g. in the armed forces, education and the police.
A final salary pension will pay a guaranteed income in retirement to the individual (from the former employer). The income usually lasts indefinitely and rises yearly to keep up with the rising cost of living. The income level is determined by factors like the individual’s years of service and salary.
However, final salary pensions – like the State Pension – cannot be inherited in the same manner as a defined contribution pension. Some schemes might offer an ongoing benefit to surviving dependents or a spouse, albeit at a reduced level.
An annuity operates similarly to a final salary pension by providing an ongoing retirement income. However, this is a financial product which is typically purchased from an insurance company using an individual’s pension funds (in a defined contribution pension).
Ideas for pension planning
Each client’s retirement plan will look different depending on their unique financial goals, circumstances, needs and priorities. Some individuals rely almost completely on their State Pension (although this is unlikely to cover most clients’ retirement expenses). Others use a combination of pension types to provide an overall income.
As a general rule, it is wise to ensure you get the best State Pension possible. The benefits – e.g. rising and indefinite income – are valuable and difficult to replicate elsewhere. If you live with your spouse or long-term partner, then two combined State Pensions can provide a strong financial bedrock in retirement for a household.
If you have a final salary (defined benefit) pension, consider getting financial advice if you are wondering whether to transfer out of it. This can be worthwhile for some clients, such as those who wish to leave more inheritance to their loved ones. However, the benefits are usually too valuable to give up.
Those with one or more defined contribution pensions should also consider professional advice to ensure they are fully optimised. For instance, certain workplace pensions may not offer sufficient investment choices to members (e.g. fund options are restricted to one provider), or the fees may not be competitive. A financial adviser can help you survey your options in the wider pension marketplace and ensure you get the best deal.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
