5 key pension facts you need to know for Pension Awareness Day

In September, various campaign groups and government-backed bodies will host Pension Awareness Day.

With events running from 11-15 September, Pension Awareness Day is dedicated to boosting pension knowledge and information. The hope is to show savers just how useful their funds can be in providing them with the retirement lifestyle they want.

So, with this event in mind, read on to discover five key pension facts to be aware of for this year’s campaign.

1. Your pension savings can benefit from the power of compound returns

As your pension contributions will be invested for perhaps nearly 50 years or even more, one of the most notable benefits is the compound returns you can generate. This refers to the growth on growth you’ll receive over time.

For example, if you have £100,000 in a pension then, assuming 5% annual growth and not accounting for any costs or charges, you would have £105,000 the next year – an increase of £5,000.

Then, assuming you make no more contributions and the same conditions apply as the previous year, you’d see your 5% growth on that £105,000. This would take your fund to £110,250, representing greater returns of £5,250.

The same theory applies to any interest your money generates while saved within your pension, too, as you’ll cumulatively receive interest on top of interest.

When you consider how long your fund can have to grow over the course of your working life, you can see how valuable the power of compounding can be.

2. There’s no tax to pay on interest or investment returns in your pension

The effects of compound returns can be even more powerful in a pension because there’s no tax to pay on interest or investment returns, either.

Depending on certain limits, you could be subject to Income Tax on interest in savings or Capital Gains Tax (CGT) on investments, with the exemption of assets held within an ISA. These taxes can eat into the returns you would receive on your money.

Meanwhile, your money can grow entirely free from these taxes within your pension. Any interest generated by cash or bonds will be free from Income Tax, and any investment growth won’t be subject to CGT.

As a result, it can be highly tax-efficient to save and invest through your pension.

3. Tax relief makes your contributions even more tax-efficient

On top of your pension holdings growing free from Income Tax and CGT, your money is also typically even more tax-efficient thanks to the Income Tax relief you can receive on your contributions.

This tax relief will typically be applied in one of two ways:

• Through a net pay arrangement – this means your pension contributions go into your pot directly from your income before it has been taxed.
• At source – this involves your contributions coming from taxed income, with the government returning the tax paid into your fund.

In essence, that means a £100 pension contribution technically only “costs”:

• £80 for basic-rate taxpayers
• £60 for higher-rate taxpayers
• £55 for additional-rate taxpayers.

You’ll receive basic-rate tax relief automatically. If you are a higher- or additional-rate taxpayer, you can claim the higher rates of tax relief through your self-assessment tax return.

It’s worth noting that there is an annual limit for tax-relievable contributions into your pension. This is called the Annual Allowance and, in the 2023/24 tax year, stands at the lower of £60,000 or 100% of your earnings.

Your Annual Allowance may also be lower if you are a high earner, or you have already flexibly accessed your pension.

You can continue to make contributions to your pension over this limit, but these will no longer benefit from tax relief.

4. You can take 25% of your pension tax-free

When you come to draw your pension funds, the first 25% of it will be tax-free. You can access this sum from the normal minimum pension age – this is 55 in 2023/24, set to rise to 57 in 2028.

This money will not be subject to Income Tax, and you are free to use it however you see fit. It could make a significant difference in your ability to reach your retirement goals.

You can draw your 25% all at once, or in smaller chunks over time. Alternatively, you could take multiple, smaller amounts, with 25% of each being tax-free, while paying Income Tax on the remaining 75%. This means you can spread out your tax-free entitlement over time.

It’s worth noting that the maximum you can take as a lump sum is restricted to 25% of the Lifetime Allowance (LTA), even though the tax charge for funds that exceed the LTA has been reduced to 0%.

This is typically £268,275, although may be higher if you have a protected LTA.

5. Your pension could be a valuable tool for reducing Inheritance Tax

As defined contribution (DC) pensions are typically excluded from the value of your estate for Inheritance Tax (IHT) purposes, this means they could be a useful tool for tax-efficiently passing wealth to your family when you die.

For example, you could choose to live on IHT-eligible assets first in retirement. This might be investments held in an ISA, or cash from a savings account, before then drawing on your pension when you need to.

In doing so, you could leave your pension savings largely untouched, allowing your family to inherit your wealth IHT-free.

Bear in mind that your beneficiaries may have to pay Income Tax on inherited pension savings, depending on how old you are when you pass away.

Get in touch

If you’d like to find out more about how to make the most of your pension, please do get in touch with us at Britannic Place.

Email info@britannicplace.co.uk or call 01905 419890 to speak to an experienced adviser today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

All contents are based on our understanding of HMRC legislation, which is subject to change.