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  • I want a clear picture of the benefits of saving through my pension

  • Benefits of saving through your pension

    You've already taken the important step of saving into a pension. But you can never underestimate the importance of saving enough for retirement. After all, it could help you secure a comfortable income for the rest of your life.

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    You can enjoy

    • A boost from tax relief - when you pay into your pension, you receive tax relief on any top ups and regular contributions you make. 
    • Tax efficient growth - your pension fund grows largely tax-free. This can help boost the amount you have in your pension.
    • Tax free cash - you can usually take up to 25% of your pension savings as a tax-free lump sum (depending on your plan/scheme rules and personal circumstances). 

    Tax benefits are subject to HM Revenue & Customs (HMRC) limits. Tax relief depends on individual circumstances and may change in the future.

     

  • Why should I put more into my pension?

    The more you pay into your pension, the more potential there is for you to achieve the retirement you want. The real boost is the tax relief you can enjoy, depending on the rate of income tax you pay. Here are some examples of how you might benefit.

    Let's take a look

    We are able to increase your personal contributions equivalent to basic rate tax. So:

    • If you pay tax at 20% - you get 20% tax relief. You'd have to pay £80 into your pension to invest £100.
    • If you pay tax at 40% - you get 40% tax relief. You’d have to pay £80 into your pension to invest £100 and claim back the additional £20*.

    • If you pay tax at 45% - you get 45% tax relief. You’d have to pay £80 into your pension to invest £100 and claim back the additional £25*.

    Please note these examples are illustrative and don't cover all income tax bands. The amount of tax relief you would receive will depend on your own personal circumstances, for example, if you live in Scotland or Wales.

    *If you pay income tax at 40%, you can claim tax relief on the extra 20% through your self-assessment tax return. You can also do this online.If you don't fill in a tax return, you'll have to contact HMRC. If you pay 45% income tax, you can only claim tax relief on the extra 25% through self-assessment. For those earning over £200,000 a year, this additional tax relief will depend on your income which may mean that your annual allowance for tax relievable contributions is reduced from £60,000 to £10,000.





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    That little bit extra can make a difference

    The effect of tax relief on pension payments over time can be considerable. The more you contribute, the more tax relief you can get, subject to HMRC limits. See our topping up page to see an example of how this could work over time.

    You can learn more about tax and HMRC limits from our 'Tax and your pension' leaflet.

     

  • Compound investment growth could make a big difference

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    What is it?

    The compounding effect is where the value of the growth in your pension goes on to grow in value too. 

    Put simply…

    • When you invest money in a pension, you make a return on it.
    • In the following year, you'll make a return on both your original investment, as well as your first year return.
    • In the third year, you'll make a return on your original investment, plus two years of returns.
    • This continues right through until you reach retirement age.

    Let's take a closer look at how it works…..

     

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    How does it work?

    Here's an example

    If you save £1,000 every year for 5 years, with no investment growth - after five years you'd have £5,000. This is still a good amount, but it's not benefiting from any growth.

    However, if you invested the same £1,000 every year for 5 years into a pension fund, with growth of 4% (after charges) would turn it into £5,633.

    • That's because at 4% growth (after charges), £1,000 becomes £1,040 after the first year. Add the next year's £1,000, and you'd have £2,040.
    • This, increased by 4% again (after charges), in the second year becomes £2,122 and so on. (See table below).
    • So, after 5 years you'd have an increase in value of £633, compared to a regular saving without any investment growth. 

    Compound investment growth example

    Year noExisting fundNew investmentInvestment growth in yearValue at end of year
     1 £0 £1,000 £40 £1,040
     2 £1,040 £1,000 £82 £2,122
     3 £2,122 £1,000 £125 £3,246
     4 £3,246 £1,000 £170 £4,416
     5 £4,416 £1,000 £217 £5,633

     

    These figures are just examples and values at the end of each year are rounded to the nearest £1.

    Please remember that the value of an investment can fall as well as rise, and past performance is not a guide to future performance. 

     

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    Benefits to you

    The compounding effect can make a massive difference

    • You'll be earning growth on previous growth - helping you build up a sizeable pension pot.
    • It's a great way to help counteract the impact of inflation.
    • You can benefit from tax efficient growth at the same time. 
    • The sooner you start investing in a pension, the more time you'll have to benefit from compound investment growth. 

     

  • How much can I put in?

    HM Revenue & Customs (HMRC) set limits on the amount of money you can build up in all your pension plans whilst still benefitting from tax relief.

  • Let's take a look

    There's no limit to the amount you can pay into your pension, but there are limits on how much tax relief you can receive. The actual amount HMRC allows you to pay into your pension in a tax year for tax relief purposes is the greater of:

    • £2,880 a year (which would become £3,600 with tax relief), or
    • 100% of your UK taxable earnings if greater, subject to the annual allowance. 

    Any statement about tax liability is based on our interpretation of current UK tax legislation and HM Revenue & Customs (HMRC) practice and does not constitute advice. It should not be treated as legal advice or relied upon as a statement of law. Registered pension schemes follow HMRC rules on payments and benefits. If these are not followed, you could pay more tax than you need to.

    Future changes in law and tax practice could affect how much your pension is worth and your tax liability. Your pension could also be affected by changes in your personal financial circumstances.

    The annual allowance is a limit on the total amount you can pay into your pension(s) each year whilst still receiving tax relief. If total payments to all your pensions, including your Phoenix Wealth pension, in any year, exceed the annual allowance, you’ll normally have to pay a tax charge on the excess. For the current tax year, the annual allowance is £60,000.

    If you have an income (including the value of any pension contributions) of over £260,000 and an income (excluding pension contributions) in excess of £200,000, your annual allowance may be reduced for that tax year. These can be complex rules, so you may wish to speak to a financial adviser for further information.

    Money purchase annual allowance (MPAA)

    If you, or someone on your behalf want to make contributions to your pension but you’ve already taken certain benefits, this may trigger the money purchase annual allowance (MPAA). You’ll still have an annual allowance of £60,000 in total, however for your money purchase pension arrangement:

    • Your annual allowance limit will reduce to £10,000 (after which you’ll be subject to an annual allowance charge).
    • You’ll lose the ability to carry forward any unused allowance from a previous tax year.

    The provider paying your pension benefits will tell you if the MPAA applies to you.

    Find out more about the annual allowance in our tax and your pension leaflet.

    Any statement about tax liability is based on our interpretation of current UK tax legislation and HM Revenue & Customs (HMRC) practice and does not constitute advice. It should not be treated as legal advice or relied upon as a statement of law. Registered pension schemes follow HMRC rules on payments and benefits. If these are not followed, you could pay more tax than you need to.

    Future changes in law and tax practice could affect how much your pension is worth and your tax liability. Your pension could also be affected by changes in your personal financial circumstances.

    Lifetime allowance

    Please note the below replaces information relating to legislation previously known as Lifetime Allowance.

    Lump sum allowance

    There are limits on the amount of tax free lump sum you can be paid when taking benefits.

    The limit is £268,275 across all pension schemes unless it relates to a death claim when the limit rises to £1,073,100.

    If you have previously applied for lifetime allowance protection then you may have a higher tax free allowance.

    What happens if I go above the allowance?

    The amount of any lump sum you receive that exceeds your lump sum allowance will be taxed as earned income under PAYE rules.

    You should speak to a financial adviser or tax specialist if you are unsure how this information may affect your own tax position. If you don't have a financial adviser, you can find one in your area by visiting Unbiased.

    Any statement about tax liability is based on our interpretation of current UK tax legislation and HM Revenue & Customs (HMRC) practice and does not constitute advice. It should not be treated as legal advice or relied upon as a statement of law. Registered pension schemes follow HMRC rules on payments and benefits. If these are not followed, you could pay more tax than you need to.

    Future changes in law and tax practice could affect how much your pension is worth and your tax liability. Your pension could also be affected by changes in your personal financial circumstances.

  • What options will I have at retirement?

    You have the flexibility to take your retirement benefits in a way that suits you.

    Usually you can take up to 25% of your pension savings as a tax-free lump sum. You then have the freedom to use the remainder of your pension as you choose from age 55 (rising to age 57 from 6 April 2028) onwards. Find out more.

    Your pension income options

  • Get the most out of your pension

    Thought about topping up your pension?

    That little bit extra could make a big difference. See how topping up your pension could help maximise what you've got. It's easy to do.

    Topping up your pension

    Manage your investment strategy

    The funds you invest in will heavily impact what you get when you retire. Find out how you could adjust your investments as you approach retirement.

    Managing your investments

    Need the help of an adviser?

    It's important to discuss your options with an adviser. If you don't have one - don't worry, we can help you find one local to you.

    Getting financial advice