- My firm is set up as a partnership or LLP, how can I contribute into a pension?
- My firm operates as a limited company, how can I contribute into a pension?
- How much can I contribute into a pension every year?
- What is the tapered annual allowance?
- What is carry forward?
- How much can I hold in pensions in total across my lifetime?
- What is a SIPP?
- How much should I pay into my pension?
- Where can I invest my pension?
- Can my pension buy into or lend money to my business?
- When can I begin drawing on my pension?
- Do I need to give up work to begin drawing on my pension?
- I can take 25% tax-free, can’t I?
- What options do I have with drawing income from my pension?
- How much will my pension pay me?
- Can I still contribute into a pension after drawing benefits from a pension?
- How much is the State Pension?
- My pension is over the lifetime allowance, how much tax will I pay?
- What happens to my pension if I die before accessing my pension?
- What happens to my pension if I die after accessing my pension?
- What is auto-enrolment?
- How much does my employer pay into my pension?
- What are ‘qualifying earnings’?
- How does tax relief work?
- Who are NEST?
- Are workplace pensions safe?
- Where is my pension invested?
- I’ve got pensions from former employers, what can I do with these?
- What happens to my pension if I leave my current employer?
- What happens to my workplace pension if I become a partner/director?
Andy Hogarth, an Independent financial adviser at Hazlewoods Financial Planning, answers common questions about pensions from people working in law firms. The FAQs relate to personal pensions and are in three parts: Pre-retirement, Post retirement, and Workplace pensions. (26 January 2021)
1. My firm is set up as a partnership or LLP, how can I contribute into a pension?
As a member of a partnership you are only able to make personal pension contributions. Tax relief will be awarded on these contributions at your highest marginal rate, up to 100% of your relevant earnings.
2. My firm operates as a limited company, how can I contribute into a pension?
Tax relief on personal pension contributions is restricted to 100% of an individuals’ relevant earnings, which importantly for directors does not include dividends. For this reason, personal pension contributions may be heavily restricted for company directors who receive most of their remuneration via dividends. However, the company could make employer pension contributions on your behalf. The contributions are likely to be deductible for corporation tax purposes, and will not trigger any immediate tax consequences in your name.
3.How much can I contribute into a pension every year?
There is a limit to how much individuals can contribute into a pension each year, known as the annual allowance. The annual allowance is currently £40,000 and includes all of the contributions that you and/or your employer pay.
4. What is the tapered annual allowance?
The annual allowance is ‘tapered’ for individuals with high income. For anyone with threshold income over £200,000, and adjusted income over £240,000, their annual allowance is reduced by £1 for every £2 of adjusted income over £240,000. This allowance is subject to a maximum reduction of £36,000, leaving a minimum £4,000 allowance.
5. What is carry forward?
Subject to certain requirements, it is possible for individuals to pay more than the £40,000 annual allowance into their pension by using unused contribution allowances from up to three years prior. For example, an individual who has contributed £20,000 for the previous three tax years has potential carry forward allowances of £60,000 (£20,000 x3), on top of their £40,000 allowance for this year, meaning they could potentially pay up to £100,000 into their pension.
6. How much can I hold in pensions in total across my lifetime?
There is no limit to the amount an individual can hold within pensions in their lifetime. However, there is a limit to how much can be drawn out of a pension without triggering tax consequences (on top of income tax), a limit known as the Lifetime Allowance. The Lifetime Allowance is currently £1,073,100. Under current rules it increases each year in line with inflation (the consumer price index).
7. What is a SIPP?
A SIPP is a Self-Invested Personal Pension. These are personal pensions that tend to provide greater flexibility with investment choice compared to other personal pensions. A SIPP will allow investments into a wide range of assets, including shares, investment funds and unit trusts. SIPPs can also invest directly into commercial property, which cannot be done through a personal pension. Some individuals choose to own their work premises or another commercial property through their SIPP, for greater tax efficiency.
8. How much should I pay into my pension?
As a rule of thumb, contribute as much as you can afford. Each individual’s circumstances will be different, but there are pension calculators that allow you to see what the likely outcome is if you contribute £X a year to your pension over a period of Y years. Of course, the calculators are based on a number of assumptions, including inflation, investment returns and life expectancy, all of which can have a major impact on the outcome, meaning care must be taken.
9. Where can I invest my pension?
This depends on the type of pension you hold. A workplace pension will offer a selected range of investment funds to choose from, whereas a Self-Invested Personal Pension (SIPP) will provide far greater options, including investing in shares and potentially the ability to invest directly into commercial property.
10. Can my pension buy into or lend money to my business?
Most pension schemes cannot lend money to an individual’s business, with the exception of a Small Self-Administered Pension Scheme (SSAS). This is an occupational pension arrangement and provides an almost unfettered investment choice, although there are strict rules for the SSAS itself.
11. When can I begin drawing on my pension?
Under current rules individuals are able to begin drawing from their pension once they reach 55. This will increase to 57 from 2028, in line with State Pension age increases.
12. Do I need to give up work to begin drawing on my pension?
No. Individuals are able to draw their pension while they are still working. So individuals can reduce their working hours and top up their reduced employment income through pension withdrawals, if they wish. But any income drawn from a pension will be added to any other income the individual receives and will be taxed at the appropriate marginal rate.
13. I can take 25% tax-free, can’t I?
Yes, under current rules 25% of pension funds can be drawn tax-free. This can usually be done in one lump sum, or over a number of withdrawals. Some older style pension plans hold a higher entitlement to tax free cash than the 25% allowed under the current rules, so check the terms of your pension.
14. What options do I have with drawing income from my pension?
Any income drawn from a pension separate to tax-free cash will be potentially subject to income tax. The pension can be drawn in three ways:
- Lump sum – the entire amount can be withdrawn as a taxable lump sum, or regular reduced lump sum withdrawals can be taken.
- Annuity – the residual amount can be exchanged for a secure, guaranteed income for life from an insurance company. It is possible to include various options in an annuity, for example a spouse’s pension, inflation linking, or a guarantee period (when a pension pays out during the period even if you die).
- Drawdown – regular and ad hoc withdrawals can be taken from the residual amount. The pension can remain invested, potentially generating returns to help fund any withdrawals being taken.
15. How much will my pension pay me?
There is no simple answer to this, as it will depend on a number of factors such as your pension contributions, life expectancy, investment returns, inflation, and how you decide to draw your pension – as an annuity, a lump sum, or drawdown.
This retirement income options tool is useful.
16. Can I still contribute into a pension after drawing benefits from a pension?
Yes, however there are strict rules surrounding this and the contribution limits, so care must be taken. The amount that can still be contributed will depend on the amount you have withdrawn from your pension, and how this was done (eg tax-free cash and/or income).
17. How much is the State Pension?
The New State Pension was introduced in 2016 to replace the Basic State Pension. To receive a full New State Pension, individuals are now required to hold 35 years of qualifying National Insurance contributions. The current full State Pension is £175.20 per week, and under the current rules this amount increases each year by the rate of inflation (consumer price index), average earnings, or 2.5% – whichever is greater (known as the ‘triple lock’).
18. My pension is over the lifetime allowance, how much tax will I pay?
Funds withdrawn from pensions over the £1,073,100 Lifetime Allowance (see 6) are subject to a Lifetime Allowance Tax charge. This is charged at a rate of 55% for lump sum payments, or 25% for income payments (plus income tax).
19. What happens to my pension if I die before accessing my pension?
You are able to name a 'desired beneficiary' for your pension fund, providing the appropriate form is completed and lodged with your pension provider. Generally, monies held in personal pensions will not form part of your estate for inheritance tax purposes, and should death occur before the age of 75 they will be free from income tax. Should death occur after 75, the pension will be subject to income tax at your beneficiary’s marginal rate.
20. What happens to my pension if I die after accessing my pension?
This will depend on the income option you have chosen. Under an annuity, it is possible to include a guarantee period or spouse’s pension. However, if these options aren’t included your pension will die with you. If you have used drawdown, setting up regular withdrawals, any funds that have not been withdrawn from your pension will be payable to your beneficiaries subject to the tax rules (see 19).
21. What is auto-enrolment?
Subject to a couple of small exceptions, auto-enrolment requires all UK employers to enrol their ‘eligible employees’ into a workplace pension and contribute to the pension. Eligible employees are those aged between 22 and State Pension Age and earning over £10,000 per annum. Those employees that don’t meet these criteria can opt in to the pension.
22. How much does my employer pay into my pension?
Under auto-enrolment employers must pay at least 3% of employee’s qualifying earnings into their pension. The employee pays 4% and the government adds tax relief of 1%, adding up to a total contribution of 8%. Under the rules employers are able to choose a different band of earnings to base pension contributions on, eg basic salary, which may mean slightly different contribution amounts.
23. What are ‘qualifying earnings’?
Qualifying earnings were introduced by auto-enrolment and are the default earnings option for employers to base pension contributions on. Qualifying earnings are employees’ band of earnings between £6,240 - £50,000, however this will change in future tax years. This includes salary, bonus, commission, overtime and certain statutory payments such as maternity pay.
24. How does tax relief work?
Individuals are entitled to claim tax relief on personal pension contributions up to a maximum of 100% of their relevant earnings at their highest rate of income tax. This is a valuable benefit and reduces the cost of pension contributions. For example, every £1 paid into a pension will cost a basic rate taxpayer 80p, a higher rate taxpayer 60p and an additional rate taxpayer 55p. Most workplace pension schemes operate a ‘relief at source’ contribution structure whereby basic rate tax relief is claimed directly from the government within your pension. Any entitlement to higher or additional rate tax relief needs to be claimed from HMRC either via a Self-Assessment tax return or through amendment of your tax code.
25. Who are NEST?
National Employment Savings Trust (NEST) is a workplace pension scheme provider, set up by the government specifically for auto-enrolment. NEST guarantees to offer a workplace pension to all employers, irrespective of their size, with the same terms and charges. Since being established NEST has grown to become the UK’s largest provider of workplace pension schemes.
26. Are workplace pensions safe?
The Financial Services Compensation Scheme (FSCS) covers all workplace pension providers who are authorised by the Financial Conduct Authority (FCA). If the provider goes bust the FSCS will pay 100% of the claim, with no upper limit.
27. Where is my pension invested?
All workplace pension schemes have a default investment fund into which all members are enrolled. In addition to this, there are other funds for members to choose from, including higher and lower risk options. If you wish to change your pension investment fund it is up to you to contact your pension provider to make the necessary arrangements.
28. I’ve got pensions from former employers, what can I do with these?
It is likely that you will be able to transfer these pensions into your current workplace pension should you wish. However, there are a number of factors to consider before doing so, such as the charges payable under each plan, the benefits it will provide, and the strength of each provider. Altermatively you can keep your pensions separate.
29. What happens to my pension if I leave my current employer?
Your pension will be made ‘paid up’, meaning the pension will remain invested but with no further employer and employee contributions adding to it. If you wish to restart pension contributions, it is likely that you can contact your existing provider and set up a direct debit. Otherwise you may be able to transfer your pension into your new employer’s pension scheme.
30. What happens to my workplace pension if I become a partner/director?
If you become a partner, you will no longer be part of auto-enrolment, as you will be deemed self-employed, and therefore pension contributions will likely cease. At that point your plan will be made paid up, and should you wish to continue contributing personally, you will need to contact your pension provider to make the necessary arrangements.
For directors, this will depend on whether you hold a contract of employment with your employer or not. If a contract exists, and at least one other individual holds an employment contract, then you will continue to be deemed a worker for auto-enrolment, meaning your contributions can continue as before. If no contract exists then you will be exempt from auto-enrolment, and you should follow the guidance above for partners, with the added option of making employer pension contributions.