Understanding UK pensions and retirement provision can be complex and difficult. Here’s our handy guide with some brief definitions of the key terms you need to know, and links to where you can find out more.
An insurance contract that pays out a guaranteed fixed income stream, usually to retirees for the rest of their lives.
How much you are able to contribute to a personal pension within each tax year (6 April to 5 April) before you must pay tax. For the 2023/24 tax year it is set at £60,000 or 100% of your salary, whichever is lower. This amount can also change if you start taking money from a pension.
Having met the required criteria, an employee becomes a member of a workplace pension scheme without having to ask to be part of it. All employers must offer a workplace scheme and enrol eligible workers.
Basic State Pension rate
The full basic State Pension is £156.20 per week for the 2023/24 tax year, though this is dependent upon your National Insurance record. If you’re a man born on or after 6 April 1951 or a woman born on or after 6 April 1953, you’ll get the new State pension instead.
Carry forward rule
A rule that allows you to make pension contributions exceeding your annual allowance while still benefiting from tax relief. You can make use of any annual allowance not used during the previous three tax years, provided you were a member of a registered scheme. However, certain conditions must be met.
Defined benefit scheme
A workplace pension scheme whereby the paid amount is determined by how long you’ve been with the employer and the salary you’ve earned during that time, or your final salary. Now becoming increasingly rare, a defined benefit scheme generally pays out a secure income which increases each year in line with inflation. Also known as a final salary scheme.
Defined contribution scheme
This can be a workplace or personal pension; with contributions from the former usually being deducted from your salary before tax. Unlike defined benefit schemes, the outcome for the retiree is not guaranteed, with the value of the pension depending on how well the pot of investments perform.
A flexible way to access your pension in retirement. From the age of 55, rising to 57 in 2028, you can use pension drawdown to take income from your pension pot, while keeping the rest invested. You can take up to 25% from your pension tax free, with further withdrawals taxed at your marginal rate of income tax.
Finishing work when you’re younger than your State Pension age. You can start withdrawing workplace and private pensions from the age of 55 (increasing to 57 from April 2008).
Final salary scheme
A type of defined benefit scheme where the pension benefit is typically based on the last few years’ earnings before retirement.
When someone dies, inheritance tax is charged on their estate at a rate of 40% of the value of some assets above a certain threshold. It is paid out of the deceased’s estate, rather than by the beneficiaries who inherit from it, and the executor of the will is responsible for sorting it out. The current ‘nil-rate band’ for IHT, below which there is no tax to pay, is £325,000.
Since pension freedoms were introduced in 2015, those 55 and over (57 from April 2028) have had the option to access a cash lump sum from the pension pot through drawdown. You can take 25% of your pension tax free, with any further withdrawals subject to income tax (see ‘Drawdown’).
Money purchase annual allowance (MPAA)
A rule applicable to defined contribution schemes. If you start to take money from a pension pot, the amount that you can still contribute to your pensions while still getting tax relief might reduce. Each person has an annual allowance for how much they can contribute tax-efficiently to their pension each tax year, but for those who’ve ‘triggered’ the MPAA the amount drops to £10,000 each year.
New State Pension
The new State Pension was introduced on 6 April 2016. You can claim it if you’re a man born on or after 6 April 1951, or a woman born on or after 6 April 1953. The full amount claimable is £203.85 per week, though this is dependent upon your National Insurance record.
Transferring your pension pots into one single scheme, such as bringing workplace pensions from previous jobs you’ve held into a personal pension. Pension consolidation should mean less admin so giving you more control, a clearer idea of how much money you’re likely to have in retirement, and potentially better value if if it reduces your fees.
Separate from the State Pension, this is a benefit available for those over the pension age and on a low income. It can also help with housing costs, such as ground rent or service charges.
A pension that has been withdrawn from either through drawdown, though a tax-free lump sum withdrawal, or through the arrangement of an annuity. You can crystallise a personal pension from the age of 55.
Also sometimes called a private pension, this is a tax-efficient way of investing for your retirement. A personal pension locks up funds until you turn 55, and for most people the annual allowance is £60,000 (for the 2023/24 tax year). Basic tax relief is applied at 20% from the government when you make contributions, though the amount you are entitled to is linked to the highest band of income that you pay.
Self-invested personal pension (SIPP)
A type of personal pension that lets you manage how your money is invested. You choose which investments to invest your money in and actively manage those investments. SIPPs are often more suitable for large contributions and, because you control how your money is invested, they might be better for experienced investors. They can also have higher charges.
A type of personal pension with strict government rules about how they’re managed. Stakeholder pensions have low minimum contribution amounts, only a few investment options and caps on how much the provider can charge you.
A regular payment from the government that most people can claim when they reach the State Pension age, which is dependent upon when an individual was born (see ‘Basic State Pension rate’ and ‘New State Pension’). You can check your State Pension forecast on the government website.
When you add money to your personal pension, the government does too in the form of pension tax relief. It’s a way to encourage people to save for their retirement. If you’re a UK taxpayer and under the age of 75, every tax year you may be able to get tax relief on pension contributions up to 100% of your earnings, or on contributions up to the government-set annual allowance, whichever is the lower of the two. The annual allowance is £60,000 for the tax year 2023/24.
If you have multiple pensions, especially if you’ve changed jobs, it can be hard to keep track of your overall retirement pot. Combining your pensions into one pot can help you take control and keep track of your wealth, and can usually be done with relative ease so long as you have the scheme details.
Any pension offered by an employer to its employees. All employers in the UK must offer one to its staff, with a percentage of your pay automatically added to the pot every payday. Most companies will also contribute to their employees’ pensions either matching or bettering their contributions.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice. Please note that during any transfer, your investments will be out of the market.
Tax treatment depends on your individual circumstances and may be subject to change in the future.