It’s Pension Awareness Week next month from 14 to 18 September, a full five days dedicated to helping UK savers make sense of how their retirement pots will support them when they finish their working lives.

The trouble with pensions is that they’ve become increasingly complicated over the years, with changes in rules and allowances. As a result, your pension knowledge may be lacking or even outdated, and you may not be as pension aware as you might think.

Make sure you familiarise yourself with these need-to-know pension facts so you can make the most of your pot in retirement.

Your pension is an investment

Many people see their pension as a savings pot for later life, unaware that the money is actually invested.

A professional manager will invest your retirement savings on your behalf, aiming to produce returns that will boost the amount you’ll have available in retirement. At the very least, this is designed to ensure your money keeps up with the rate of inflation.

Your pension provider may offer different funds for you to hold your money in too, allowing you to select how much risk you’re willing to take on.

This makes pensions a great way to potentially see a return on your money without having to choose your own stocks and shares.

Government tax relief boosts your pot

One of the greatest benefits of pensions is the tax relief you’ll receive from the government when you make contributions. This is the government’s way of incentivising pension saving.

Tax relief works by subtracting the Income Tax you would have paid on your contributions. It then pays this amount into your pension pot at your marginal tax rate.

For basic-rate Income Taxpayers, that means an £80 payment into your pension will see you receive £100 into your pot.

For higher- or additional-rate taxpayers, a £60 or £55 payment respectively gives you that £100.

Tax relief helps to boost the size of your pot. This money will also be invested, giving it the opportunity for further growth.

The Annual Allowance and Lifetime Allowance limit tax relief

There are two key thresholds that limit how much tax relief you can receive on your pension: the Annual Allowance, and the Lifetime Allowance.

Pension Annual Allowance

The Annual Allowance is the maximum amount of pension contributions you can receive tax relief on in a single tax year. As of the 2021/22 tax year, the Annual Allowance is £40,000 or 100% of your earnings, whichever is lower.

If you have a high income, you may be subject to the Tapered Annual Allowance. This could see your Annual Allowance reduced to just £4,000.

The Tapered Annual Allowance comes into effect if you have an adjusted income (i.e., before tax is deducted) of £240,000 or more. For every £2 you exceed this threshold, your Annual Allowance will be reduced by £1.

So, if you have an income of £312,000 or more, you may only be able to claim tax relief on just £4,000 of your pension contributions.

The Annual Allowance resets at the end of tax year. You can carry forward unused Annual Allowance for up to three years.

Lifetime Allowance (LTA)

The LTA is the maximum amount of pension contributions you’ll receive tax relief on across your entire lifetime. As of the 2021/22 tax year, the LTA is £1,073,100.

Ordinarily, the LTA rises in line with the consumer price index (CPI). However, in the spring Budget, the chancellor announced that the LTA would be frozen until 2026, as part of the measures to help pay for the excess public borrowing brought on by Covid.

If your pot exceeds the LTA, you’ll be charged tax to recoup the tax relief you receive. A lump sum taken from a pension over the LTA incurs a 55% tax charge. Meanwhile, withdrawing income will incur a 25% tax charge.

Pension Freedoms drastically changed the way you can withdraw your pension

In the past, most retirees would use their pension to purchase an annuity, guaranteeing them an income for life. This could be inflexible, and often saw savers die before they had drawn as much money from their annuity as they had held in their pensions.

The introduction of the Pension Freedoms legislation in 2015 has now changed these rules, offering you even more flexibility in the way you can take your retirement funds.

From aged 55, rising to 57 in 2028, you can take 25% of your pension as a tax-free lump sum. You can use this money for whatever you want, whether that’s paying off your mortgage or taking a cruise around the world.

You can still use all or part of your pot to buy an annuity if you want to. Alternatively, you could withdraw the whole sum and pay the associated tax bill.

You can also use “income drawdown”, allowing you to withdraw part of your pot while keeping the rest invested. This allows you to reach a happy medium where you can take income, while still making the most of investment returns on the remainder of the pot.

Your pension is the best way to reduce your carbon footprint

One remarkable pension fact that many people are unaware of is how your pension can reduce your impact on climate change.

According to research from Make Your Money Matter, Aviva, and Route2, your pension is the most effective way to reduce your carbon footprint.

Just as you can choose funds that change your level of risk, you can also switch over to a “green” pension fund. These funds invest exclusively in companies that seek to reduce the human impact of climate change.

This could be through what they do as a business to make profit, perhaps building sustainable infrastructure such as solar panels or wind turbines. Alternatively, it could be in their corporate policy towards climate change, such as a pledge to make their business carbon emissions net zero.

As your pension is an investment, you can reduce your passive carbon emissions by investing in companies that actively try to lower their own emissions, as opposed to other businesses that do not offer the same promises.

Speak to us

This list is not exhaustive and there may be many ways for you to become even more pension aware.

If you’d like help with your pension from a professional pension adviser, please speak to us at Holborn Financial.

Email info@holbornfinancial.com or call 020 8946 8186 to find out more.

Please note

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. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.