Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “The new tax year is a time for people to make resolutions on how to get the most from their retirement planning. People often have lots of questions and we’ve answered some of the more popular ones that we’ve received from clients so you can get a head start with your pension.
1. How do I trace lost pensions?
If you think you’ve lost an old pension, then give the government’s Pension Tracing Helpline a call or head to their website. All you need is either the name of your old employer or the pension provider. The helpline can’t tell you if you do have a pension, but they can give you contact details so you can find out. You could find a pension worth thousands of pounds. Once you’ve tracked down your old pensions you may decide to consolidate them, so you have an overarching view. However, before you do that make sure you don’t incur any exit fees or potentially miss out on valuable benefits such as guaranteed annuity rates.
2. How much do I need in retirement?
This is a popular question that is difficult to answer – the reality is it depends on what you want. Some people will want a retirement filled with travel to far flung destinations, while others will want something a bit more modest. Other people will have to factor housing costs into their plans, whereas some will have paid off the mortgage. All these things, as well as what age you retire and your general health, will have a big impact on how much you will need. It’s important to take the time to think about this in advance so you have some sense of how much you will need on an annual basis. You can then use online pension calculators to give you an idea of what you are on track for. This gives you the time to fill in any gaps if needed.
3. How does tax relief work?
Tax relief is a great incentive to contribute to your pension. You receive tax relief at your marginal rate so this means a £100 pension contribution would cost a basic rate taxpayer as little as £80. For a higher rate taxpayer, it would only cost as little as £60 and for an additional rate taxpayer it could be just £55. This could be lower if you contribute via salary sacrifice. If you are a basic rate taxpayer then you should receive the right amount of tax relief on your contributions automatically, but if you pay tax at a higher rate, you may need to claim some of it. It all depends on how your contributions are made.
If you are in a salary sacrifice arrangement or what is known as a net pay arrangement, then you should get the right amount of tax relief. This is because with these methods your pension contribution is deducted from your salary before income tax is calculated. This means you only pay tax on what is left so will get full tax relief immediately. However, if your contributions are made via ‘relief at source,’ then things work differently, with contributions deducted from your salary after tax. The employer takes 80% of the contribution from your salary, after tax and pays this to your pension provider. The pension provider then reclaims the basic rate tax relief of 20% from HMRC. So, if you are entitled to tax relief at a higher rate, you need to claim the extra yourself. Many private pensions, such as SIPPs, as well as some workplace pensions, are set up as relief at source so it’s worth checking with your provider. You can backdate claims for up to four years and if you don’t fill out self-assessment forms you can claim the relief online through the gov.uk website or via post.
4. Do I pay tax on pension income?
Up to 25% of your personal and occupational pensions can be taken as tax free cash – up to a maximum of £268,275 for most people. Aside from that if your pension income is worth more than £12,570 per year then you will pay tax on it. This also includes the state pension. Currently the new full new state pension stands at just a whisker below this level. This means that even drawing a small pension income from elsewhere will tip you into tax paying territory. From April 2027 it is expected that the full new state pension on its own will breach £12,570 and this risks more pensioners being pulled into taxpaying territory. The government announced at the last Budget that from April 2027 any pensioner living solely on the state pension would not have to pay tax on it. This won’t cover income from the additional state pension though - otherwise known as the state second pension. We are awaiting further detail on this.
5. Can pensions be inherited?
Yes, your pension can be inherited depending on what type of pension you have. If you have a defined benefit pension scheme, then you need to check the scheme rules. Some will allow for a child to inherit under certain circumstances, but others will only allow a spouse or civil partner to receive the death benefits.
If you have a defined contribution pension you have more flexibility as to who gets the benefits, but you must fill out your expression of wish forms with your pension provider, so the administrators know who you would like your pension to be paid out to in the event of your death. Not keeping these up to date can cause delay and frustration at an already difficult time and can mean the wrong person gets the benefits.
If you die before the age of 75 then your child won’t have to pay income tax on what they inherit. If you are over age 75 then they will, but it will be at their marginal rate, not yours.
As it currently stands pensions are not usually part of your estate for inheritance tax purposes but from April 2027 they will be, so you need to be aware of any potential tax bill your beneficiaries might receive. If you are taking an income from an annuity, then unless you have value protection then there’s nothing to pass on to anyone.”
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