Jason Shares His Expertise On How to Start a Private Pension - With Esther Shaw At The Daily Telegraph
The original article was published in Telegraph Money on 20th March 2024, but is only available to Daily Telegraph subscribers. As part of our mission to empower as many people as possible to make better financial decisions, we have published below all the information Jason shared with them, so you get the maximum benefit from it (not just from what was published).
OVERALL
In my view, most workplace pension schemes are low cost, have decent fund choice options available and will allow employees to top them up. Therefore, your work pension should be your first port of call when deciding on additional contributions. Only if it doesn’t meet your requirements should you look at alternatives.
WHAT ARE THE BENEFITS OF A PRIVATE PENSION?
It’s always important to remember that saving for your retirement is just about building up enough money. It doesn't necessarily need to be in a pension.
Paying into an ISA or paying off your mortgage are equally valid retirement planning strategies.
One of the main benefits of a pension is that when you pay money in, you receive income tax relief at your highest marginal rate.
Another benefit is that all income and growth within your pension build up tax-free. The compounding of these tax-efficient returns can be a significant benefit, although this latter point could be said of ISAs too.
In addition, when you come to take money out of your pension, you can have up to 25% of it tax-free (subject to Lifetime Allowance limits). The rest will be subject to Income Tax.
Another significant benefit of pension funds is that they can generally be inherited by your chosen beneficiaries free from inheritance tax. Furthermore, if you were to die before age 75, your beneficiaries would not even have to pay income tax on withdrawals from the inherited fund.
HOW DO I START A PRIVATE PENSION?
Most people will have access to a pension via work which is probably a low-cost scheme, with a decent range of fund choice options to suit different risk profiles and life stages.
Making sure that you understand the pros and cons of your current workplace pension would be the first step before considering opening a separate scheme.
Also, if you have changed jobs over the years, you might have a good pension scheme from a previous employer that you could still pay in to.
IS IT TOO LATE TO START A PRIVATE PENSION?
If paying into a pension is a sensible thing to do, then now is a better time to start than putting it off further. If you start late, it may be that your pension fund alone won’t be sufficient to fund your retirement. Instead, it can just form part of your wider retirement planning picture.
HOW MUCH SHOULD I SAVE?
That comes down to affordability, tax efficiency and the pension Annual Allowance.
For most people, the Annual Allowance of £60,000 is far in excess of what they could reasonably expect to pay into a pension.
From a tax-efficiency perspective you should think about what tax bands your income falls into.
You get tax relief at your marginal rate of income tax.
This means that, once you have reclaimed the relevant tax relief, for a 20% taxpayer it costs £800 to get £1,000 in a pension, whereas for a higher rate taxpayer it only costs £600 and for an additional rate taxpayer it is just £550.
There are various rules of thumb, such as dividing your age by two and putting in that number as a percentage of salary, so, someone who is 50 might aim to pay in 25% of their earnings for example.
In reality, it comes down to affordability and personal circumstances. If paying into a pension makes sense, then the answer is “as much as affordability and pension rules allow you to”.
If you think you will be a basic rate taxpayer in retirement but are a higher or additional rate taxpayer now, you can get excellent value from pension contributions.
If you are basic rate taxpayer now but expect to move into the higher rate as your career progresses, over and above what you need to pay in to benefit from your employer’s pension contributions, you might choose to save into an ISA in the knowledge that you can make larger pension contributions in a few years’ time and benefit from a higher rate of tax relief later.
WHEN CAN I ACCESS MY PRIVATE PENSION?
The main downside to pensions is that you usually can’t access your money until at least age 55 (rising to 57). This means that if you are in your 20s or 30s, your money may be inaccessible for multiple decades. It won’t help you with a deposit on a house or paying for emergencies, for example. You therefore need to weigh this up against the tax benefits.
HOW TO CHOOSE THE RIGHT PRIVATE PENSION?
Choice of pension scheme comes down to factors such as charging structure, fund choice, ease of administration and flexibility around how you can draw the pension or what options your beneficiaries would be given in the event of your death.
For example:
How old you are - the closer you are to retirement, the more important it will be for you to have a modern pension that gives you flexibility around how you draw benefits.
The size of your fund – the larger the fund, the more you’ll benefit from fixed fee charges whereas small funds benefit from percentage-based charges.
GET IN TOUCH
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The value of your investments can go down as well as up, so you could get back less
than you invested.
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