Are there any tax implications?
According to Martin, one of the biggest advantages of paying money into a pension are the tax benefits. “A key plus of a pension plan is the tax relief, which comes in two forms depending on whether you're a basic-rate or higher-rate taxpayer,” he explains. “You get some tax back on the money you put into a pension, while gains from the investments you make with that cash are largely tax-free. You also get the tax back you've paid on all contributions, if you're under 75, subject to an annual allowance.” Limits can vary depending on your age, employment status and how long you live, but more information can be found here.
What happens when you leave your job?
You tend to leave your pension scheme when you leave your employer, or if you decide to opt out or stop making contributions. But even if you do, the benefits you’ve built up still belong to you. Therefore, you normally have the option to leave them where they are or to transfer them to another pension scheme. “Your scheme administrator or pension provider should tell you which options apply to you,” says the TPAS. “Most schemes will allow you to transfer your pension pot to another pension scheme, which could be a new employer’s workplace pension scheme, a personal pension scheme, a self-invested personal pension or a stakeholder pension scheme.” It’s important not to rush into a decision. “You can generally transfer at any time up to a year before the date that you are expected to start drawing retirement benefits,” adds the TPAS. “In some cases, it's also possible to transfer to a new pension provider after you have started to draw retirement benefits.” For more information, click here.
And what if you take an extended absence, like maternity leave?
As long as you are still being paid by your employer, your pension contributions should continue – although the terms might vary slightly depending whether you’re on a DC or DB pension scheme. “If you decide to take a period of unpaid leave after your paid parental leave, you don't need to continue contributing during the period of unpaid leave,” adds the TPAS. “Your employer may also cease contributing, unless your contract of employment states otherwise, but when you return to work, you (and your employer) may be able to pay extra contributions, depending on the scheme’s rules.”
Is there any way to protect the money in your pension?
With savings accounts, up to £85,000 per person per institution is fully protected should your bank go bust, with that protection provided by the UK's Financial Services Compensation Scheme (FSCS). The good news is this £85,000 limit has been extended to pensions and investments from 1st April 2019. “The FSCS safety applies if you lose money due to the pension or investment firm going bust,” explains Martin. “Usually with pensions, if you buy through a broker it doesn't hold any of the cash, it simply acts as a conduit for you to put the money into whatever funds or investments you want. Therefore, in the unlikely event the broker goes bust, your money should be okay, and still held by the fund manager or bank it resides with. The £85,000 protection applies should any of those go bust.” If protection kicks in, the FSCS will first try to transfer your funds from the failed company to another company. Bear in mind that if you've got a DB pension, there's a risk of your employer going bust, leaving you with no pension income at all. In this case, the Pension Protection Fund (PPF) is available and may pay compensation.
So, what happens when you retire?
Once money has been paid into a pension, it can't be withdrawn on a whim – it must stay there until you're at least 55. “At that point, you can take 25% of it as a tax-free lump sum, with the rest ideally providing an income for the rest of your life,” explains Martin. “If you get approached before you're 55, it's a scam known as pension liberation or unlocking. These scams are so damaging, the government banned cold calling about pensions in January 2019.” Think of it this way: when your regular work income stops, it's decision time, although ideally you should start preparing a few years beforehand. “Provided you're over 55, you'll be able to take as much of your pension pot as you like, when you like – though drawdowns above the tax-free 25% will be taxed at your marginal rate – so 20% if you're a basic-rate taxpayer, and 40% or 45% if you're a higher or additional-rate payer, or the amount you've taken from your pension pushes you into that rate,” adds Martin. Finally, it’s worth noting that in September 2020, the government announced that it was planning to raise the earliest age you could access your pension from 55 to 57 in 2028, so this may impact how you plan for your retirement.
For more information on pensions, visit ThePensionsAdvisoryService.org.uk or TheMoneyAdviceService.org.uk