Retirement planning – why do I need a pension?

When planning for retirement, we believe you should never underestimate your needs, or the potential benefits available to help you grow your wealth.

And whatever your financial circumstances, however wealthy you are, a well-planned pension can be one of the best ways to invest for your future and make the most of your money.

According to the Wealth Index Report by Saltus, published this year, a staggering 96% of high-net-worth individuals nearing retirement (people aged 55 or above with at least £250,000 of investable assets) significantly misjudge how much they need in their pension pot.

To remedy that, while the best time to start a pension is widely considered to be when you’re 18, the next best time could be today. 

Who can have a pension?

If you are a UK resident under 75 you can have a UK pension and could receive tax relief on your contributions to it. If you have an income, you could get tax relief on 100% of your UK taxable earnings. If you don’t work, you could still get basic rate tax relief on the first £2,880 you contribute into your pension each tax year.

What are the different types of pension?

A pension is a tax-efficient ‘wrapper’ that allows you to invest in a fund that goes towards your retirement. It can come in many forms, but the three main ones are a workplace pension, state pension or personal pension. Here’s a quick look at each of them…

Workplace Pension

If you work, both you and your employer can contribute to your pension through your salary before tax is deducted (depending on the scheme). If you’ve moved jobs several times throughout your career, you might have a number of these pensions.

State Pension

Your eligibility for this pension will depend on when you were born and how many ‘qualifying years’ you have on your National Insurance record. Full details are on the government’s website.

Personal Pension

Whether you are self-employed or don’t work and want to  grow your wealth for later life, a personal pension could help. It can still be used as a tax-efficient investment tool even if you don’t have an income. It allows you to invest your extra money each month or add a lump sum, and benefit from tax advantages (more on that below). It also provides the added flexibility of allowing you to combine your other pensions in one place.

You cannot normally access the benefits of these types of pensions until you turn 55 (rising to 57 in 2028).

The value of investments, and the income from them, can go down as well as up and you may not receive the amount of your original investment. You should continue to hold cash for your short-term needs.

What tax benefits does a personal pension offer?

A personal pension could bring you government tax relief of 25%, so more is added to your pension than you pay in. Unlike a workplace pension, where contributions are made before tax is deducted from your income, a personal pension involves the government topping up your pension contributions by 25% to offset any tax you have already paid on the money.

This could mean, for example, that if you wanted to add £10,000 to your personal pension, you would pay in £8,000 while the government contributed £2,000. But crucially, if you pay a higher rate of income tax, you could potentially claim further tax relief through your tax return.

Even if you don’t earn an income, tax relief applies to up to £3,600 a year paid into your pension. So to invest that amount each year, you pay in £2,880 and the government adds in the extra £720 – relatively small amounts but they could add up over time.

For the 2024/25 tax year, the maximum amount you can generally pay into a pension that qualifies for tax relief is usually 100% of your salary or £60,000 (whichever is lower). This includes contributions paid by you and your employer. If you’re a high earner with an income above £200,000 a year, this maximum amount could gradually reduce to £10,000. Again, more information on pension contribution limits can be found on the government’s website.