Isa full? Your pension can help

Pension Doctor From tax to fees, our expert Becky O’connor solves your dilemmas

Q: How much can I put into a pension?

In theory, you can put as much as you like in a pension, but because of certain rules the sum you can deposit and receive tax relief on is limited, as is the amount you can put in each year without facing a tax charge.

The annual total you can put in tax-efficiently is either up to your maximum earnings, or up to £60,000 – the annual allowance.

If you contribute more than the annual allowance, you could face a tax charge on the extra that you put, which cancels out any tax relief you have received on the contribution.

The annual allowance includes both your personal contributions and employer contributions. It also applies across all of your pensions, and is not per pension.

There is no longer a Lifetime Allowance, but there is still a limit on the amount of tax-free lump sum you can build up. It’s 25pc of the total savings, up to £268,275.

Q: How does tax relief work?

This depends on the type of pension scheme you are in.

Broadly, you get tax relief on pension contributions that is equal to the highest rate of income tax you pay. It means if you put money into a pension instead of taking it as income, you don’t pay the tax on it that you would have paid if you had kept it as income.

The current rates of income tax are 20pc basic-rate, 40pc higher-rate and 45pc additional-rate in England. It means a basic-rate taxpayer pays in £80 to their pension, and tax relief turns this contribution into £100.

The way it is applied depends on what type of scheme you are paying into. “Net pay” workplace schemes will add all of your tax relief to your pension contribution, regardless of the rate of tax you pay. However if you pay into a “relief at source” scheme, which is the type that normally applies to self-invested personal pensions (Sipps), only the basic amount of tax relief is added by your pension provider. Any extra tax relief you are owed as a higher or additional rate taxpayer, you have to claim yourself via a self-assessment tax return, or by contacting HMRC.

Q: How do I move my pension and what pension providers are there?

First, you need to check that moving a pension is a good idea and you aren’t going to lose valuable guarantees. It’s also not a good idea to move from an active employer scheme as you risk losing employer contributions (unless your employer is willing to pay into a new scheme for you).

It’s much easier to move old-defined contribution workplace schemes than it is defined-benefit schemes – and moving the latter is often not a good idea financially.

You can move old pensions to your current workplace scheme if that makes sense, or you can choose a new provider to consolidate your pensions.

The process is usually that you research your new provider and get in touch with them. You will need details of your old pensions – specifically, the providers and policy numbers. There’s a free Government pension tracing service that can help you find them if you have lost the details. The new provider can contact your old providers and initiate the transfer.

Q: What exactly is a Sipp?

A Sipp is a self-invested personal pension. It’s one you set up for yourself, and offers a range of investment choices: either a selection of readymade plans, or stocks and shares – a bit like if you had a stocks and shares Isa.

Q: How much should I be paying in charges?

It’s important to keep an eye on charges as they can have a detrimental impact on your retirement savings over time. As a general rule, anything over 1pc would be pricey. Some workplace schemes carry charges far lower, at around 0.3pc to 0.5pc, but they cannot go over 0.75pc in any case, because there is a cap.

Charges for some plans or investments with personal pension providers can be higher, usually if those investments are actively managed.

Q: What’s considered a ‘good’ investment return?

According to the Barclays Equity Gilt study, which examines long-term returns, the average annual stock market return is about 5pc. Net of charges, this would be lower. So anything around 5pc to 7pc would be considered above average.

Pensions are long-term investments. The ultimate aim is to beat inflation over time. However, because they are long term, there can be some big ups and downs along the way.

This might make pensions seem less appealing – you might wonder what the point is of investing if you are going to come out on average with a return not much higher than a savings account? What makes pensions so attractive is the tax relief on the initial contribution, plus investment growth, compounding over time.

Q: How often should I review my investments?

Once a year is probably enough. Reviewing them too frequently can cause unnecessary anxiety, particularly in volatile times. Even worse, it can cause people to change their investments too frequently, when letting them simmer for a longer time would produce a better result.

Q: What tax do I pay when I take my pension?

The first 25pc you take out is tax-free. Once you start to draw down an income or take an annuity what you take is subject to income tax at your marginal rate. Most pensioners are basic-rate taxpayers. What you leave in a pension is generally not subject to inheritance tax and if you die before age 75, they would normally not pay income tax, either.

Q: When can I take my pension?

The Normal Minimum Pension Age is 55, rising to 57 from 2028. Some pensions associated with certain occupations have lower minimum ages.

Q: How much do I need for a comfortable retirement?

The definition of “comfortable” may be subjective, and will certainly depend on the your fixed costs, as well as the cost of the things you want to do in retirement – those who live in a bigger house may need to set aside more for upkeep, for example. However, it’s good to have at least an idea of how much you might need, which is why the Pensions and Lifetime Savings Association (PLSA) has come up with some retirement living standards. It says a comfortable retirement would cost around £43,400 a year for a single person and £59,000 for a couple.

The pot size required for these amounts, again according to the PLSA estimates, would be between £490,000 and £790,000 for a single person and between £280,000 and £450,000 for a couple.