Investing & Performance | 9 September 2024

Retirement planning – why do I need a pension?

Here are just a handful of reasons why a pension could really benefit your financial future.

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.

There’s something important to keep in mind on all this. The new Labour government is announcing its first Budget next month, and changes to pension benefits could very well be part of that. But currently, as things are now, these are the potential benefits. If in any doubt, it could help to get financial advice.

Should I combine my pensions?

As you progress through your career, you might have changed employers and collected numerous workplace pensions along the way. Or you could have several personal pensions with different providers.

A downside of this could be that it becomes a challenge to keep track of how each pension pot is performing and what fees you are paying. You could even lose them completely. A study by the Pensions Policy Institute published in 2022 found that over 2.8 million pension pots were considered lost, and the value of lost pensions had risen to £26.6 billion.

If this sounds familiar, a potential solution could be to bring your pensions together in one place. This might make it easier to track your total pension amount while paying just one fee.

Another potential benefit of combining your pensions is that it’s possible your retirement fund could become better managed. Sometimes, over several years, some underlying funds in a pension could lose their edge – for example if the pension’s original fund manager decides to depart. This could result in older pension funds simply going with the flow of financial markets instead of being more proactive.

However, it’s worth noting that there could be reasons to keep at least some of your pensions where they are, such as high exit fees or a guaranteed rate of income. It’s worth checking with your current providers first whether there are any disadvantages to transferring. Again, if unsure, financial advice could help.

Three more reasons to consider a personal pension with Coutts Invest

Whether you are self-employed and need to start a pension, working and want to combine your pensions, or simply looking to grow your wealth in a tax-efficient way, a Coutts Invest personal pension could be for you. Alongside the potential tax benefits, here are three more reasons to consider it.

 

Easy to set up, monitor and manage

Simply choose from five ready-made funds and decide between regular monthly payments or a lump sum to maximise your annual pension allowance. You can then manage your pension anytime and anywhere via the app or online. 

 

Run by experts

Your pension is looked after by our experienced investment experts. The five ready-made funds vary in strategy so you can choose the one that best suits your preferred approach to investing.

 

You pay one, simple fee

The charges are transparent and straightforward, so you know exactly how much you are paying each year in fees.

 

Get started

Find out more about Coutts Invest and pensions to see how you could get retirement ready.

GET STARTED

How will new pensions legislation affect me?

Wondering what the measures in the government’s recently unveiled Pension Scheme Bill might mean for you? Our financial planning service provides a complete review of your finances and how to arrange them for your future. This includes an assessment of your retirement plan, a look at your investment portfolio and how best to protect your wealth.

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We're here to help, but please be aware that we cannot offer any tax advice. We recommend you contact an independent tax advisor to discuss your personal tax situation. Tax reliefs referred to are those applying under current legislation which may change. The availability and value of any tax reliefs will depend on your individual circumstances.

To have a Coutts Invest pension, you must be over the age of 18 and under the age of 75 and be a UK resident for tax purposes. You cannot make contributions if you are a US citizen or US Green Card holder. You cannot access your pension benefits before the age of 55 (rising to 57 in 2028). Eligibility, fees and charges apply. When transferring any existing pensions, exit fees may apply.

This article should not be taken as advice.

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