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The basics of pensions and retirement

Pensions are a long-term investment. The retirement benefits you receive from your pension plan will depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed, and can go down as well as up. The value of your plan could fall below the amount(s) paid in.

The benefits of a pension

A pension is one of the best ways to save for retirement. It’s the tax benefits that make pensions such a big draw.

The Government will normally give you tax relief that helps increase the value of your plan. If the basic rate of tax is 20%*, for every £80 you pay into your plan each month, the Government will automatically top up your pension with an additional £20. If you are a higher or additional rate taxpayer, you may be able to claim additional tax relief via your annual tax return.

* If you are a Scottish taxpayer the tax relief you will be entitled to will be at the Scottish Rate of income tax, which may be different from the rest of the UK in the future.

Pensions are a long-term investment. The retirement benefits you receive from your pension plan will depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed, and can go down as well as up. The value of your plan could fall below the amount(s) paid in.

Accessing your pension pot

Once you turn 55 you can access your pension pot. You can then leave it so it has the potential to continue to grow, or take some or all of it to use as you need.

When you take it, some will be tax-free but the rest will be taxed.

Pension tax

You can take 25% from your pension pot tax-free, the other 75% will be taxed.

Your pension income and tax

The money you take from your pension pot is considered an income, so is taxed in the same way as your salary.

Once you’ve had your tax-free lump sum, any money taken from your pension pot is added to any other income you get in the tax year you take it. This includes paid work, taxable income from additional pension pots and your State Pension.

What happens when you die

If you die before taking your benefits the value of your pension pot will be used to provide benefits to your dependants or beneficiaries.

If you’ve taken an annuity, your pension income will cease, unless you’ve arranged a joint life or guaranteed annuity. If you invest in flexible drawdown any money left in your pension pot will go to your beneficiaries.

Consolidate your pension pots

If you have more than one pension pot you might want to consider consolidating all of your pots into one for simplicity.

New pension legislation

You now have much more freedom over what to do with your pension savings.

Your pension pot choices

There are three things you can do with your pension pot once you’ve taken your tax-free lump sum.

You could:

  • Get a guaranteed income for life with an annuity
  • Leave your pot invested, taking from it when needed with flexible drawdown
  • Take the rest in cash

You could of course do a combination of these options.

Work and take income from your pension pot

You don’t have to retire to access your pension pot. You can continue working and take income from your pension pot from the age of 55. Just remember that once you’ve had your tax-free lump sum, anything else you take is part of your yearly income and will be taxed accordingly.

Remember the earlier you take your pension, the less time your pension pot will have the opportunity to grow.

Protecting your pension

Your plan is fully covered by the Financial Services Compensation Scheme. More information about compensation arrangements is available from the Financial Services Compensation Scheme, who can be contacted on 0800 678 1100 or 0207 741 4100 or via their website at www.fscs.org.uk.